The RSI (Relative Strength Index) gives overbought/oversold readings accurately
only in ranges. In trends, they would tend to give many false signals. See the circled
signals below. While the RSI can be used to spot divergences, the MACD is better
to use typically for that.
The Relative Strength Index (RSI) calculates a ratio of the recent upward price
movements to the absolute price movement. The RSI ranges from 0 to 100. The RSI
is interpreted as an overbought/oversold indicator when the value is over 70/below
30. You can also look for divergence with price. If the price is making new highs/lows,
and the RSI is not, it indicates a reversal.
The Relative Strength Index (RSI) was developed by J. Welles Wilder.
Formula:
To recap: The best technical indicators are firstly trend lines/support/resistance/volume.
After that would come the versatility of the MACD. It can be left on the chart at
all times. Use only buy signals in the uptrend and sell signals in the downtrend.
Use both signals in a range.
In Trends use 2-3 of the following maximum:
1. Trend lines
2. Moving Averages
3. MACD (buys in uptrend or sells in downtrend)
4. ADX (above 30)
5. PSAR (for stops in strong trends) OR
6. ATR levels for stops
In Ranges, use 2-3 of the following maximum:
1. Support/Resistance
2. MACD – both buy and sell signals
3. Bollinger Bands
4. RSI
5. Slow Stochastics
6. ADX below 30
7. ATR levels for stops