How Knowing the 4 RSI Trading Signals Will Elevate Your Trading Level Skill

There are 4 RSI trading signals that traders should be aware of when they place any trade. They have nothing to do with price being overbought or oversold. RSI (Relative Strength Index) was never designed with that in mind. Prices that push RSI to 70 or above are not necessarily overbought and prices that push RSI to below 30 are not necessarily oversold. If this is the way you are using RSI then you would be better off not using it because these signals would be leading you astray.

The 4 RSI trading signals are composed of two types: divergences and reversals. Most traders are very comfortable with finding divergences on their price charts. There are two divergences patterns, positive meaning a momentum force upward or bullish, and negative meaning a momentum force downward or bearish. They are commonly called positive divergence or bullish divergence, and negative divergence or bearish. Theoretically when you have a positive divergence price should move upward and vice versa for a negative divergence.

The second signal is less known and almost never considered. They are reversals and as with divergence there are two. A positive or bullish reversal pushes price up and a negative or bearish reversal pushes price down.

You may be wondering what the difference is as it sounds like they do the same thing. A positive divergence is signaled when RSI is higher on the chart but price is lower. However, a positive reversal is signaled when RSI is lower on the RSI chart but price is higher. If you were to locate situations like this and watch them you might make the observation that positive divergences don't occur under the same circumstances and you would be right. The same would be true with negative divergence and negative reversals.

Reversals are signaled when the trend is ready to resume. Divergences are signaled when trends retrace. Statistical data shows that in a downtrending market that the smart trader knows to look for negative reversals and in an uptrending market to look for positive reversals. Divergences then are found in the counter trend therefore making them riskier to trade. Reversals are best traded as the momentum is with the trend. Momentum creates trends. Being on the right side of the trade is knowing when to join back into the trend and this is what a reversal signal will tell you.

The concepts of RSI are simple to follow and they are objective because divergences and reversals can be programmed. This has been done using what is called The RSI Paint Indicator. This indicator is used on a MetaTrader 4 chart and can locate either divergences, reversals or both. Most traders seeing The RSI Paint Indicator for the first time are rather surprised at the number of these signals that can appear in a short span of time regardless of the time frame or the currency pair. When all are seen together they provide momentum patterns that provide objective trading patterns.

Once you know how to plot divergences and reversals and place trades using statistical data that highlights best RSI levels, best hours to trade, and when each signal should be traded, you will begin to elevate your trading skills to a whole new level.