Modern Techniques to Improve Technical Analysis

Using a New RSI Technique to Improve Trading Signals

RSI techniques are numerous and they improve the way we use it. This article discusses the range reversal technique, a new way of validating the RSI’s signals.

Quick Introduction to the RSI

The relative strength index (RSI) is a widely used momentum oscillator that plays a pivotal role in technical analysis, helping traders and investors assess the strength and potential direction of price movements in financial markets. Developed by J. Welles Wilder Jr., the RSI has a rich history dating back to the late 1970s and has become a fundamental tool for market analysis.

The RSI is primarily calculated using two key components: the average gain and the average loss over a specified period. Wilder’s original formula for the RSI involved a 14-day lookback period. The formula is a complex one, but it essentially normalizes price movements to a scale of 0 to 100, with readings above 70 indicating overbought conditions and readings below 30 suggesting oversold conditions.

A 14-period RSI

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Using the Range Reversal Technique on the RSI

The range reversal technique uses a combination of the conservative RSI technique and a filter that looks for a ping-pong state. But what are those two terms?

• The conservative RSI technique signals a buy opportunity whenever the RSI shapes a value above the oversold level after having been below it for at least one period, and signals a short opportunity whenever the RSI shapes a value below the overbought level after having been above it for at least one period.
• The ping-pong state is the stable and healthy state of an oscillator that…