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by Martha Stokes CMT
RSI is much more than just an Overbought / Oversold Indicator…
There are numerous stock indicators designed to show overbought or oversold price conditions in stocks, however, most such indicators are written for that purpose only. Wilder’s Relative Strength Index, RSI, is the only price oscillator that not only can be used as an overbought / oversold indicator but also as a comparison price indicator.
As a relational indicator, RSI pairs perfectly with volume oscillators, including Time Segmented Volume, which is also a relational indicator. Teaming these two dynamic oscillator indicators together provides a new way to analyze both price and volume in relation to one another in stock price activity.
As the market structure has become far more complex with far more venues, professional orders that are custom-tailored to the Alternative Transaction System (ATS) clients, High Frequency Trading (HFT) algorithms that trigger on more complex order routing, and with far more activity from foreign and sovereign funds buying on the US exchanges using professional venues created just for these funds, selecting indicators that can reveal Dark Pool activity, which is intended NOT to move price, has become a daunting challenge for many technical traders.
Indicators that were once excellent for stock price analysis now fail to alert and signal ahead of price movement. Instead, most retail and technical traders are discovering that a trading instrument’s price has moved hugely and they did not see any entry pattern before that move. This creates a situation where more and more traders are chasing a run rather than riding a run with the HFTs and other fast-moving price action.
Learning to use RSI with TSV and other volume indicators provides a superior analysis of stock price action that helps traders enter sooner for higher gains on fast-moving stocks. The stock chart below shows the leading indications that are exposed through comparing the harmony between RSI, used in this instance with an added center-line oscillation, and TSV with its built-in center-line oscillation.
The harmonious patterns between TSV and RSI confirm that price and volume are moving in tandem, a common pattern when larger lots are buying a stock ahead of a momentum run.
The result is a momentum run that moves up nicely for a good momentum-style trade. Using the floating center line on RSI allows for easier comparison between the RSI and TSV indicators.
Another method that can be used to improve the analysis between volume activity and price activity is to have both TSV, or whatever volume oscillator a trader prefers, and RSI on the same chart layout window. Overlaying the two together, as two primary indicators, provides an excellent means of analyzing both volume over time and price over time. Since Time Segmented Volume compares current volume to prior volume over time, and RSI compares current price to prior price over time, the analysis of price, quantity, and time, the 3 data streams that are most critical for stock pick analysis, can be done quickly.
Harmonious patterns between the two indicators reflect consistent buying patterns from Dark Pools. These tend to conclude with a compression of the sideways price pattern followed by a sudden huge HFT run or gap and run.
Click Here for a free video training lesson on Leading Indicators.
For in-depth training on using the versatile RSI indicator and supporting indicators for better trade decisions for stocks, stock options, ETFs, indexes, and more, look into the RSI Indicator Study, an online class starting August 6th.
Martha Stokes CMTMember of the Market Technicians AssociationMaster Rated Technical Analyst: Decisions Unlimited, Inc.Instructor and Developer of TechniTrader® Stock Market Courses
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