Cookies are used for the best experience on my website.

Accept Cookie Policy

No internet detected

Check your connection and try again.

Logo Image

No match found

Buy a coffee

I launched this blog in 1995. Since then, we have published 1603 articles. It's all free and means a lot of work in my spare time. I enjoy sharing knowledge and experiences with you.

Your support

Have you learned something new by reading, listening, or watching my content? With your help, I can spend enough time to keep publishing great content in the future.

Or, select an option below:

A small slice of my data processing time each month

It's ongoing work running this site and what's really great is ongoing support. Here's a sense of what goes into this site: research topics for discussion. Manage the Tech stuff: website, SEO, graphics, email, back-end servers, DNS routing, edge servers. Create advertisements and load the campaigns in Google Ads. Manage the social media forums (Facebook, Reddit, Twitter). Write updates to the blog. Keep GitHub up-to-date.

$4.50 — A large cappuccino at my local

Things just work better with coffee! I like to take the kids to school then grab a cappuccino from my local on the way home before beginning the things that take mental energy.

$8.99 — A month of Netflix for some quiet nights in

A lot of the work on this happens after hours when I should be relaxing on the couch. Help me make it so and I promise to keep off the devices for a bit!

$11.50 — Fund a month of email delivery

This site sends out thousands of emails every month. For that volume and to ensure deliverability, I need to pay MailChimp.

$20 — Pay for one month of AWS storage fees

Websites are not free. The storage alone takes some cash. If you are willing to lighten the burden, we can keep this site up online.

$30 — One hour's pay for a graphics artist

Art doesn't create itself without a hand to guide it. I can't draw, so I need to pay others to help.

$45 — Pay a full-stack web developer for one hour

Much of the work on this site happens on weekends which means giving up time with the kids. Help me pay the developers so I can give my kids more time.

Forgotten Way of Using RSI

Use This Technique on the RSI to Improve Your Trading



  • 937

  • 4906

  • 5

  • 0

  • 0

Sometimes we use indicators without knowing that they have more potential than they show. For example, the RSI is only used in one or two ways but there are a lot of techniques that you can apply on the RSI. This article presents a forgotten way of using the RSI.

Relative Strength Index 🔗

First introduced by J. Welles Wilder Jr., the RSI is one of the most popular and versatile technical indicators. Mainly used as a contrarian indicator where extreme values signal a reaction that can be exploited. Typically, we use the following steps to calculate the default RSI:

Calculate the change in the closing prices from the previous ones.
Separate the positive net changes from the negative net changes.
Calculate a smoothed moving average on the positive net changes and on the absolute values of the negative net changes.
Divide the smoothed positive changes by the smoothed negative changes. We will refer to this calculation as the Relative Strength — RS.
Apply the normalization formula shown below for every time step to get the RSI.

USDCAD with the 13-period RSI

The above chart shows the hourly values of USDCAD with the 13-period RSI. As the RSI is bounded between 0 and 100, extreme values tend to be associated with market reactions. The most common extreme levels (which are called overbought and oversold levels) are 30 and 70, however, other levels are used such as 25 and 75, or even 20 and 80.

Generally, traders use the RSI to confirm a reversal bias. The trading conditions are therefore:

  • A long (buy) bias appears whenever the 13-period RSI is close to 20 as market participants think that the market is oversold. This is of course more complex in real life.
  • A short (sell) bias appears whenever the 13-period RSI is close to 80 as market participants think that the market is overbought. In reality, the back-tests prove that there is little value to this technique.

BTCUSD with the 13-period RSI

In the original book where the RSI has been introduced, the author spoke of a way that we can use the RSI but it is not commonly applied today due to its subjective nature. This way is the act of applying classical price patterns on the RSI.

This article will show how to find signals from a very known pattern called the head and shoulders.

Check out my weekly market sentiment report to understand the current positioning and to estimate the future direction of several major markets through complex and simple models working side by side. Find out more about the report through this link that covers the analysis between 07/08/2022 and 14/08/2022:

Applying the Head & Shoulders Pattern on the RSI 🔗

The head and shoulders pattern is a bearish reversal configuration that appears as 3 tops where the middle top is higher than the first and the last top. Take a look at the below chart to see how we have identified a head and shoulders pattern on the RSI which in turn correctly predicted the market’s direction afterwards.

USDCAD with the head and shoulders pattern

Basically, we should look for an RSI that is not far from the overbought zone (or above 50 at least). Then, we wait for the formation of the three tops on the condition that the middle top slightly touches or surpasses 80 (the overbought level). Whenever the neckline (line in blue) is broken, the bearish signal is validated.

The inverted head and shoulders pattern is a bullish reversal configuration that appears as 3 bottoms where the middle bottom is lower than the first and the last bottom. Take a look at the below chart to see how we have identified an inverted head and shoulders pattern.

USDCAD with the inverted head and shoulders pattern

Basically, we should look for an RSI that is not far from the oversold zone (or below 50 at least). Then, we wait for the formation of the three bottoms on the condition that the middle bottom slightly touches or breaks 20 (the oversold level). Whenever the neckline (line in blue) is surpassed, the bullish signal is validated.

The next chart shows an example of two successive patterns that showed good reactions.

USDCAD with the head and shoulders pattern

The issue that remains is that the pattern is subjective in nature and does not have clear conditions.

If you want to see how to create all sorts of algorithms yourself, feel free to check out Lumiwealth. From algorithmic trading to blockchain and machine learning, they have hands-on detailed courses that I highly recommend.

Summary 🔗

To sum up, what I am trying to do is to simply contribute to the world of objective technical analysis which is promoting more transparent techniques and strategies that need to be back-tested before being implemented. This way, technical analysis will get rid of the bad reputation of being subjective and scientifically unfounded.

I recommend you always follow the the below steps whenever you come across a trading technique or strategy:

  • Have a critical mindset and get rid of any emotions.
  • Back-test it using real life simulation and conditions.
  • If you find potential, try optimizing it and running a forward test.
  • Always include transaction costs and any slippage simulation in your tests.
  • Always include risk management and position sizing in your tests.

Finally, even after making sure of the above, stay careful and monitor the strategy because market dynamics may shift and make the strategy unprofitable.

This license allows reusers to distribute, remix, adapt, and build upon the material in any medium or format, so long as attribution is given to the creator. The license allows for commercial use. If you remix, adapt, or build upon the material, you must license the modified material under identical terms.