The RSI has a bad reputation, and this is mainly due to everyone trying to use it with a stop loss to get entries when it’s in extended conditions. However, it’s incredibly reliable if you are a position trader like me as it give a great initial entry which you can average into to make profits easily.

Here is the RSI/TDI Dashboard shown in the video: https://www.mql5.com/en/market/product/62698

You can get the market structure reversal indicator mentioned here: https://www.mql5.com/en/market/product/46295

Video Transcript

What I’ve done today is put together a quick, it’s not so much of a lesson if you like, but a quick analysis of the RSI. Because the RSI has got quite a bad sort of rap, if you like. A lot of traders slag off the RSI. And I know no-nonsense4x, he hates the RSI is the worst indicator in the world. It’s in his top five worst indicators. But it all depends how you use it and how you view it. And everybody can use an indicator in a different way. So one of the things I got asked last week, which is what made me put this on my list today, was why I picked the RSI over all the other oscillators. And I kind of wanted to do a little explanation of why I use the RSI.

I know in the pro course I’ve got lots of information on the RSI. But one of the reasons I use the RSI, and I’ve tested lots and lots of other indicators, is because the RSI is based on not so much price movement but price strength which is slightly different to most of the other oscillators. So most oscillators you see out there like the stochastics, the CCI, I know there’s a Arun up there, there’s loads of loads of different oscillators out there. you will find will follow price very religiously and very accurately. But the thing I like about the RSI is that the RSI accelerates more as you get bigger price movements.

And you can fine tune it a lot easier than other indicators because there is only one real setting in the RSI, which is your period. This obviously the apply to will make slight difference to it, but there is only one setting where things like the stochastics, you’ve got three different settings. And you can choose high, low and close, close. You’ve also got four different MA methods to use with stochastics.

So you can really, really make this thing do all sorts of stuff. And you can curve fit it really easily to price. So if we change that to a 15, you get a completely different stochastic. So one of the reasons I like this is, there’s just one setting to use in there. And the way that I came about using the RSI was through backtesting. So whenever you’re looking at any indicator that you want to use, whether it be a stock MT4 one, a commercial one on MT4, or when you’re looking at any strategies, the important thing to do with any strategy is to backtest it and find out if there is an edge that it can give you when you’re putting any strategy or any system together.

So with the RSI, this is how I basically back tested the RSI for basket trading. When I was looking into dropping stocks completely, I wanted to make sure that I had a condition indicator, market condition indicator, that was as reliable as possible. And I back tested lots and lots and lots of indicators. And this is basically how I did it. So I thought I’d put together this as a quick lesson today on RSI to show you why I chose the RSI over the other indicators and how I came to that conclusion.

So basically, what we’ve got here is just literally RSI 14. And I’ve drawn red lines, basically, when the RSI got extended beyond the 32 and the 68 level. Actually, I’ve just chosen the 32 in this case here. So what I’ve done is I’ve drawn a line when we get extended below the 32 level, yeah? Just so we can see which candle was responsible for that. And then what I’ve done is I’ve drawn a line, a little green line, where I think I might have got into a trade.

Yeah, so what we’re doing, and this is what I do every day, obviously, is we look at the RSI dashboard. I look at what’s extended, and I look for opportunities to get in when it gets extended, yeah? So you can see that the Aussie dollar CAD, I just chose this one at random because it was the top of the list, has been in a downtrend, yeah?

So what I’m looking for here is every time the RSI gets extended to the downside, I’m looking to trade counter trend. So I’m basically creating the worst case scenario here. We know that price is going down and I’m looking to take longs on it. So what I’ve done is I’ve drawn a little green line and I’ve said basically whenever we get a green candle, I assume I would have got a reversal alert on a lower time frame and I would have got in with a trade. So I would have taken one in there, price pushed down and you can see there’s like lots of wicks to the upside. If I just zoom in a little bit. So you see we had lots of wicks to the upside here so I assumed I’d have taken another trade there and then it pushed down again and we got a big bullish engulfing so I assume I would have taken another trade there. But the first trade was taken when the RSI first got extended The goal of this exercise when I first did it was to see if price will pull back far enough to my original position.

So what I’m looking for is the opportunity to never take a loss. Unrealistic, I know. You don’t, you know, we have to take losses in trading, we know that. But what I want to do is find an indicator that gives me the best possible chance of not taking a loss. And as you can see that was my first entry there and price pulled down, I got into another couple of positions and then it pulled back up and got back to my original entry point. So I know that when price got extended below 32 on the four-hour RSI using the RSI 14, at some point shortly afterwards it gave me an opportunity to exit all three of those trades with a profit. Yeah. Job done. So we need to test this multiple times to make sure that it works. So the next time we got extended below, waited for a British candle, took a trade, pulled back against me, waited for a British candle, took a trade, pulled back. That would have been a bit too close to get in again, pulled back, got in again somewhere around here.

We had a nice push there. So at some point we would have got in there and then price pushed back. And as you can see, got a little tick there because it came back up and got back to my initial entry. So all three of those, I had an opportunity to get out and not take a loss. So that one worked as well and so on and so forth. Pulled back down underneath the 32, decided I’d have taken a trade probably on that candle there, didn’t work out, got another nice bullish candle, took another trade, price pushed back up, got me out of both of those positions without a loss.

This one, lovely, one shot, one kill, price pulled down, took the RSI below the 32, bullish candle, jumped in straight away into profit, same story on this one, pulled down to the 32. Dubious as to whether this would have been taken because it didn’t actually get down, it touched. So difficult to tell whether that would have alerted on the dashboard. Maybe it would, maybe it wouldn’t. But either way, price got extended, plenty of opportunity to get out at any time.

Same here, got down, just touched below the 32. Bullish candle, that one was a, that was a hammer, so probably would have taken that one as well. So at some point around there, would have taken a trade. That one pushed up, easy opportunity to get out. This is the first one that failed. So here we got extended, would have taken a trade somewhere around there as it’s pushed up. We may not have done on a lower timeframe. It’s difficult to tell whether or not you would have got an entry on a lower time frame with a reverse alert, but if not, you definitely would have got one there.

So we took a trade there, pulled down, would have taken another one somewhere on there, pulled down, would have taken another one somewhere around there as this started to push back up. So as you can see here, this one did not get back up to my initial entry. Yeah. But here, these two would have given an opportunity to get out. So you could have scrapped that one and scrapped that one with that trade, which is why I put a little tick there because you’d have got out of those, but that you would never have got out of.

So this one, we would have to go into draw down control mode on. So we would have to start using some of our profits either on these trades or on other trades we’ve taken to start reducing the losses on this one because this just this move here did not give us an opportunity to get out of these trades so that one didn’t work. But as you can see again we got another below the 32 would have got in somewhere around there consolidated for a week pushed back down got us below again got another entry pushed up. So this one and this one, easy opportunities to get out of. Same again here, we would have got in somewhere when we had some bullish price action, got out.

Same here, got out, as you can see, and right now we’re down below and we’re waiting for an entry, yeah? So that’s basically how I back-tested the RSI and why I came to the conclusion that that was the best oscillator to use with the reversal alert indicator and basket trading as a strategy because as you can see we had one, two, three, four, five, six, seven, eight, nine opportunities there to take trades with multiple positions or single positions and get out of every single one without making a loss. We had one week where it didn’t give us that opportunity. But we could have got out a half of that.

And so we’ve only had to do DD to control on one position. Yeah. And I did this exercise, as I say, with stochastics, with CCI, with loads of different oscillators just to find out what worked and what didn’t. And I also used different settings. I used the 21, the 7, the 10, the 14, lots of different RSI settings as well to see which one worked the best. And this is how I came to the conclusion that the RSI 14 was better on H4, and the 21 was better on hourly and below, yeah?

So yeah, so that’s basically what I just wanted to show you and just sort of have a home why I use the RSI. And we know it doesn’t work like this every single time. We are gonna get squeezed. We’re gonna get times where this is just not gonna happen and it’s not gonna work. We’re not gonna get a decent pullback as we can see here. But that is basically the process. You can do this with any indicator. Literally just whenever I get an indicator and look at an indicator, I just check it on the chart, I draw a line with oscillators this is, I draw a line when it’s signaling that we’re potentially having a signal.

With some of them, obviously, you might find that you’ve got a 50 line and the signal is actually when price crosses above there. That might be the signal. So you can, again, just draw lines whenever you would have got an alert to say long or short or whatever that indicator is trying to tell you and just see if it gives you enough room to get out. And if it doesn’t and it fails, does it give you an opportunity after failure to get out of multiple positions, how we trade with baskets?

If so, you can use that indicator in your system or strategy. And as you can see here, I went through a phase a year or so ago where I was using nothing but the RSI. Literally RSI four hour gets extended, I just get in. Because I know how effective it is and how often it doesn’t give me an opportunity to get out. And as long as you are doing DD control and you’re keeping on top of these positions that start to go against you, you’ll be fine. Yeah, so that’s a quick lesson on the RSI, why I used it, why I settled on it. And the reason I came across the RSI was because of the TDI. Obviously those who have studied BTMM and Steve Mauro’s stuff, he uses the TDI, which is the Traders Dynamic Index, and the core of the Traders Dynamic Index is the RSI.

At the end of the day, the signal line in the TDI is just an RSI. So that’s why I started looking because that is basically what that is showing me. So you can see here, yeah, this green line is basically an RSI 14 median. Yeah. And that’s why I settled on the RSI. A lot of people use this, obviously. Somebody mentioned as well today that Sammy, Sammy’s using the TDI with the bunger bands on and the divergence.

So, you know, this is an incredibly good indicator, the RSI, which is why, you know, I think, why do people slate it? It does oversold and overbought, if you want to call it that, conditions incredibly well. But the problem is most people don’t know how to use it. How many times, if you’d have taken these trades with a stop, loss, loss, win, loss, loss, win, loss, win, couple of winners.

So I think this is why people slate it because if you just take trades when this thing’s extended, yeah, you’re going to get loads of losers with a stop loss. You’re going to get loads of losers with a stop loss anyway. We know that, that’s why we don’t use stop losses. Because all they do is make losses. But yeah, there’s all sorts of ways. So, you know, shark fins as well. Obviously, this has got a shark fin indicator built in. So, there’s other ways you can use the TDI if you want to use the TDI.

I used to use it all the time, the TDI, but I’ve stopped paying attention to divergence a lot now because what I find with divergence is when you get divergence, the RSI is extended anyway. I know I’m gonna take trade there because the RSI is extended. So if I’ve got divergence, does it matter? Probably not. Whether there’s divergence there or not, I know for a fact that when we get up there, that’s gonna happen at some point.

Yeah, there’s no divergence there. So should I take that one or not? No, well, why not? It’s gonna make me some money. So that’s why I stopped using the TDI. There’s a lot going on there and you find a lot of people like Sammy’s got on his charts. They strip out all the other crap. Strip out this red line, strip out the yellow median line, turn off divergence, turn off shark fin alerts, turn off all this stuff you don’t need.

The RSI is the core of the TDI. Use that. OK, so that’s, yeah, I just wanted to cover that today. It’s on my list of questions. So I thought I would go through why I came about using it. And that’s how you get confidence in indicators. And after you’ve done that, this exercise, when you go, wow, this looks like a really, really good indicator to use, go back further. Do the next month, go back, do the next month, do the next month, go back six months.

And if you find that it gives you a massive strike rate and you can put way more ticks on your chart than crosses, good indicator, yeah. Okay, so that’s it on the RSI. Just wanted to cover that. I just wanted to cover that.