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Archive for February 17th, 2010

You will come accross many technical indicators. But one of the most popular technical indicator is the RSI ( Relative Strength Index) Indicator. Many traders use RSI indicator to determine the overbought or oversold condition in the market. RSI Indicator values range between 0 and 100. When RSI indicator value is less than 30, it is an indication that the market is oversold. And when RSI indicator reading is more than 70, it means that the market is overbought. Get the Ultimate Swing Trading Software FREE. Learn Candlestick Charting. Master these Candlestick Patterns. 

Many traders only use RSI indicator to generate buy or sell trading signals. But if you combine, RSI with trend reversal candlestick patterns, you have a very powerful tool in your trading arsenal. These trend reversal candlestick patterns can be used to confirm the overbought or oversold levels and determine the exact entry and exit in the market.

Let’s take an example to make it more clear. Suppsoe you want to trade a stock. You are using RSI indicator to determine when the market is oversold. You wait for sometime and ultimately find RSI reading to be less than 30 meaning that the market is now oversold and you can enter your trade. But a better way would be to wait for the bullish candlestick reversal pattern to appear. So you sopt one, the famous Three Inside Up Candlestick Reversal Pattern. This candlestick pattern usually appears when the market is about to turn bullish after many bearish days. Now when you spot such a candlestick reversal pattern, it is a confirmation that the market is indeed oversold and is about to turn bullish. This is the right time to enter the market just at the level where the candlestick reversal pattern appeared.

The beauty of this three inside up candlestick pattern lies in the fact that it takes three days for this candlestick pattern to form. When you spot the first two candles formed with the candle on the first day bearish, the candle on the second day bullish but small get anxious for the candle on the third day to be bullish and higher than the open of the first candle. This gives you plenty of time to plan your swing trade.

Now, when the three inside up candlestick pattern appears, it is an indication that the market has indeed turned bullish and you are about to see a bullish market for many days. This means that the market has reversed and a new uptrend has started. This is the best time to go long on the stock. Place the stop loss close to the position where you went long as the market is not supposed to return to that level for many days. As long as the RSI reading is below 70, you can rest and relax. But don’t wait for the RSI reading to go above 70, get alert when the RSI reading goes above 50. This is an indication that the market is above to become overbought and you should start looking for a candlestick reversal pattern to appear to confirm this.

Suddenly RSI indicator changes course and soon it is in the overbought range 70. Start looking for a candlestick bearish reversal patterns like the three outside up candlestick pattern or the hanging man to appear to confirm that the reversal is about to begin. When this happens make your exit making a nice profit. Combining candlestick patterns with technical indicators such as RSI or Stochastics indicator is a powerful tool.

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