Using RSI and Bollinger Bands for Reversal Trading

Using RSI and Bollinger Bands, the trader looks for extreme ranges to time reversals and momentum trades effectively in the financial markets.

### Using RSI and Bollinger Bands to Trade Reversals and Momentum
* 📈 The Relative Strength Index (RSI) is an oscillator that ranges between **0 and 100**, with the standard settings being **30 for the oversold level**, **70 for the overbought level**, and **50 as the midpoint**.
* 🕰 Traders typically look to trade reversals when the RSI reaches extreme levels, as it indicates **potential trend exhaustion** and **upcoming price reversals**.
* 💡 "Using RSI to help time entries to the long side for momentum is not particularly helpful, but it can be useful when **spotting divergences**."
* 💰 When trading with the trend, RSI may not be necessary, except when there are **divergences between price and RSI**.
* 💥 Bollinger Bands create a channel around the price, with **99% of the price action occurring within the bands**. Price moving outside the bands often leads to **short-term corrections back inside**.
* 🔄 "The price being outside the Bollinger Bands indicates **extreme price action**."
* 🕯 ️ Beginner traders can find it challenging to **time momentum trades** and may prefer learning traditional candlestick patterns for **momentum and reversal trading**.
* 📚 "For beginner traders, it's important to learn about **technical analysis and candlestick patterns**. A **112-page PDF breaking down the favorite candlestick chart patterns** is available for download."

[Music] In today's episode, we're going to talk about the relative strength index and how you can use RSI in your trade to help you get better at predicting reversals. This is a well-established trading strategy that can help increase your accuracy by only trading reversals when you see both the Candlestick pattern and the RSI align. This is where an indicator is helping confirm or deny what you think is going to happen. Now I'm going to take it a step further and introduce using the combination of RSI and Bollinger Bands on reversals. So let's go ahead and jump into the chart. Here, what we're looking at initially is a Candlestick chart for a stock that I happened to trade just a few days ago. Now you can apply this strategy and these indicators I'm going to share with you whether you're trading stocks like I am or you're trading Futures Forex cryptocurrency. It doesn't matter because this is again part of the universal language of the financial markets.

what we have here on my chart initially are very few indicators. This is a five-minute time frame on the left, and this is a one-minute time frame on the right. These are both for the same stock, and this is something that I very commonly do when I'm trading. I have the five minutes so I can kind of be zoomed out, and then I have the one minute so I can be really zoomed in on the current candle. The indicators that I have on here include the nine moving average right here in Gray, exponential, the 20 exponential moving average, and the 200 exponential moving average. You'll see those on both time frames. The orange line is the volume-weighted average price. Down below, we have volume bars on the one minute. We have the Mac D, and on both time frames down below, you can see RSI. So let's go ahead and double-click RSI and look at it. RSI is plotted with this purple line, and it has an upper limit, a middle limit, and lower limit. Now the upper limit is at 70. The lower limit

is at 30, and the middle is at 50. The 50% mark. Now, RSI is an oscillator, which means it oscillates between a range of 100 on the top and zero on the low, although it is um, at times possible you'll see something go above and below. It's pretty rare. So, 99% of the time, RSI is going between 0 and 100. If the relative strength is 100, on the one hand, you have something that is incredibly strong, but on the other hand, it can't get really any stronger. And so, what that means is that more likely than not, at some point pretty soon, we're going to see a correction. And if we're all the way up at 100, a correction, even down to just the midpoint of 50% here, would be a very sizable correction, most likely in price. Uh, inversely, if the RSI was way down here at zero or one, that tells us that the price has been incredibly weak and could remain weak for a bit longer, especially if there's bad news. But when

it reverses it again, has lots of room to reverse back up, and that's when we can see a big swing in price. So if we focus on using this to time reversals, the areas that we're going to be interested in is when we're near extremes. And so that's why we have these limits at 30 and at 70. So above 70 or below 30 is when we're going to be at more extreme ranges, and we really only want to consider reversals in these areas. So if the RSI, just for instance, is kind of oscillating like this, this is not in the pink here or purple, this is not an extreme enough range, and most likely trying to time reversals here, we're not going to get enough volatility to make profit. As you probably already know as an active Trader, we volatility, but of course, we need to manage risk, and our job is to try to make an accurate prediction about what the price is going to do next. So we don't want to get in and just have very small moves.

lose money on the spread and on slippage. We need to see sizable moves and so only focusing on trading reversals when the RSI is up at these extreme levels can help with that strategy. However, we can also use this when we're trading momentum. So, in terms of these indicators, both on the one-minute and the five-minute time frames, I have them set the exact same way. So, this is a 14-length period using the SMA 14 period here, and the style has just these upper, lower limits, and then the one in the middle. This is the standard RSI setting that most traders will use and is default when you add RSI to your charts. I'm a big fan of using indicators in their default setting because I want to make sure that I'm viewing the market in more or less the same way that 90% of other active traders are viewing it. The reason is the signals when they're seen by more people will be sort of responded

to accordingly. So, if everyone's seeing a red light, then everyone's going to stop. If everyone's seeing a green light, everyone's going to go, more or less. So, being one of the first to see the red light or green light or predict it will come with intuition, and that is the result of experience. But ultimately, I want to use standard indicator settings, and I'm using the same thing on my MacD on the one minute. Here. Now, I'm primarily, personally, a One Minute Trader, so I usually am using my indicators on the one minute chart more closely than on the 5 minute. But if you're primarily a 5-minute Trader or a 15-minute Trader or a daily Trader, you want to use your indicators on that time frame. Okay. So, we're going to start by looking at this momentum stock. So, this is a stock that went up 100% in just a few hours. This is really some impressive price action. So, if we look at this on both the one minute and the 5 minute

I'll zoom out the one minute just a little bit more. Let's take note of things that we see on the RSI, especially. So first, the move begins here after hours, and as the stock squeezes from 4 to 450 up to 5, you notice that the RSI goes all the way up here to a peak of, let's see, it's just about 87. It really gets super extended right up here, uh, 83. Sorry, goes up to 83. So we're certainly well above our, uh, upper limit. However, we know that we only stay at these upper limits for a limited period of time, and this ends up dropping back down and coming back up right here. Now, this I find really interesting. So let's actually zoom in to this, um, this first beginning of the move right here. So some traders might have looked at this as an opportunity to buy right up here at 550, which was this candle here. You might have thought, well, look, we've just had this big move up, we've pulled back and

now we're coming back up to break through this level. Now, I'll note a couple different things that make me think twice about this setup. But focusing first on RSI, we have the RSI that moved up, and now the RSI is moving down, which means you actually have a divergence because the RSI is moving down here while the price moves back up. Whenever that happens, I pay extra close attention, and I take the signal from the RSI that this is more likely to be a false breakout. The second indicator that is helping reaffirm that position is the fact that the MACD, the moving average convergence divergence indicator, has crossed over right here at this line. I usually focus on trading the front side of the move before the MACD crosses over, and once it crosses over, I'm very hesitant to take these second attempts for move higher. Now, from a charting perspective, this is showing a double top. A double top is created when you have a move higher and a pullback.

that's a little bigger than you would like to see. This is a bigger pullback than we would like to see, and it's noted by the fact that we broke below the nine moving average, and we came all the way down to the 20. So it's a steeper pullback. As a result of the steeper pullback, the MACD crosses over because the moving averages are converging. MACD is the moving average convergence divergence indicator. So the MACD is converging, moving averages are converging. RSI is trending down, and that's a divergence from the price moving back higher. This is a high of being a false breakout here at this double top. This is a no trade. Now, if you did not look at either of these indicators, we'll just hide it for a second. You only looked at the chart. The only thing you would have to go on is the fact that this is a possible double top, but we did pull up here. We did sort of a little micro pullback, which could

almost be viewed as a cup and handle formation, and clearly there was some volume here. There were some people that bought into that breakout, but it didn't end up working, and I think the result, um, on this is because the pullback was a little bit too steep. And when you have a steeper pullback, that's when you're going to have the MACD crossover, and the RSI is going to pull down, and those indicators should have helped keep you out of this trade. Okay, so then we pull back, the RSI dips back down, here we go to a low, um, of about 35, so we do come pretty low, but not low enough that this would trigger a purchase based on the RSI being in the oversold territory. The price then comes back up to 550, here as you can see, and right in this area, we now see that the RSI is stair-stepping up, right little pullback, stair-stepping up. The MACD has crossed back over in the positive right here. So at this point, right here, we now

have a green light. This actually looks okay and acceptable for a trade right here at 550. So we back this up right here at this moment. You would look at this and you might think, Well, I don't know, look it did this false breakout right here. But remember, right there we were getting a divergence in the MACD, in the RSI, and we were having a negative MACD because we had this big pullback. Now we've pulled back and we've had the opportunity to reset, and we're starting to pull away. So this is a spot right here where the MACD is check, yes, and the RSI is check, yes. It's okay, okay that the RSI is near the overbought area because it's trending up. We're not looking for, I mean, so number one, this is not a reversal pattern on the chart. It's not extended enough to be a reversal. This is a pattern that is a flat top breakout pattern for a break of resistance. And so let's fast forward so what we get here.

is this break through 550 all the way up to 650 right here up to about uh 6 624 which is still a really nice move. We then pull back just a little bit and then into the next pre-market session we push higher. Now this starts to get a little interesting because right here notice now we're starting to see a divergence again and that was caused by this initial candle that dropped down. Now the MACD dipped below for a second is back in positive but the RSI is now as it makes as the price makes a new high right here. The RSI does not make a new high and that's what I pay close attention to when price is making new highs but RSI is not. We're having a divergence that indicates more likely than not the price is not going to sustain this level. Now this is a spot where you could consider a reversal trade because the RSI is above and we're having this divergence. So now we get a pull back here we dip back down we start

to go sideways and right here. Watch this, the MACD crosses over. So now we have a MACD crossover. The RSI is starting to stair-step back up. We pull back a little bit. So right now, another diver. Well, actually, we're not really in a divergence. We're pretty well matched here. Now one thing that I'll say is I don't typically like to take trades below volume-weighted average price. So although we have a crossover here, I'm typically not going to take that trade unless the price is a little higher. So we're going sideways, we're going sideways, and then, yeah, right. So right here, we end up getting a surge of momentum. Now, this surge of momentum was right at 7:00 a.m., and you can see all of a sudden a ton of volume came in. So that's because 7:00 a.m. is when a lot of retail brokers come online. So what ends up happening is you get a massive boost of volume. Price surges up and

immediately, the RSI goes into the overbought territory. Okay, so now we hit this big peak here, and this is where some people are going to start looking for a reversal. RSI is extended, the price is extended. We don't have a divergence, but we have it right here, right here. We have a divergence. The price goes higher, the RSI does not go higher. So this is now an indicator that we're still in the overbought territory. This is a spot to watch for a short. If the price was really strong, first of all, it wouldn't have pulled back as much as it did right here, causing the MACD to start to converge and starting to cause the RSI to dip. So we get this sort of we push higher, but we stall out. The RSI shows it's making a lower high. And now you get this sort of slower flat and then unwind. It's just not able to push higher. Now, in my own trading, I find that using RSI to help me time entries to the

long side for momentum is not particularly helpful. I find MACD is more than enough for my trading. However, when I am on auto trading, which is a strategy I focused on as a beginner, I really liked RSI, and I really liked Bollinger Bands. So now let's pull up one of the scans that I've developed here, which is the RSI Trend. So this RSI Trend scanner is actually searching the whole market for stocks that have the highest and lowest RSIs in the whole market. Okay, so what's the idea behind this scan? I'm trying to search for these extremes. I'm searching for these data points right here. Now we know that we can search for a stock that has a 99 or 100 RSI, or a 0 RSI. If we find it, we know that the stock is currently in this extreme area right here, so it may be worth considering a trade. Now it's not a guarantee that this is going to give us an opportunity because there can be stocks that have a 100 RSI, but they have

no volume, and they're not liquid. So, this stock, for instance, let's just look at the top one. Okay, so this, for instance, has a 100 RSI. All right, so this is based on the 15-minute. It's very extended. The price has just been moving higher, moving higher, but the volume is a little light, 1.3 million shares. We may not, at this current moment, see an opportunity. So let's go ahead and add one more indicator here. We're going to add the Bollinger Bands. All right, so Bollinger Bands, we're popping them on, and what we're going to look for are spots where the price is outside the top Bollinger Band and the RSI is extremely extended. Because the price being outside the Bollinger Bands indicates extreme price action. For those that aren't familiar with how Bollinger Bands work, they create a band around the current price. So you can see it's sort of this channel here, the blue lines, the top and the bottom. So it creates this channel. 99% of price action occurs

within the channel at the Bollinger Bands. Ever in the unusual case that the price is outside the Bollinger Bands, as it is here, it almost always leads to at least a short-term correction back within the Bollinger Bands. So let's see. We'll just scan through some of these charts here and see what we see. Okay, so CVS is another one, and you'll notice that these charts are actually between these two were somewhat similar, which is common and more likely that this ties in with overall Market strength. So when the overall Market is strong, a lot of these stocks will just trend with the market. This, however, is a really interesting example. So look at this. So if we were scanning, we saw this stock, and this was Friday going to the close. So we had 1, 2, 3, 4, 5 green candles in a row, one small red candle right here, and then four more green candles followed by what candlestick shape that is a shooting star. Okay, so a shooting star candle. We'll pull up the

whiteb here. This is a candle that is created as the price squeezes higher. Let me just grab my marker here. So I'll do this in BR, that's fine. So just going to erase this. So the price has been moving higher, one, two, three, four, five. Let's just say those are long body green candles. The price opens here and then it squeezes up, and immediately sellers push it back down, and it closes like this. This is called a shooting star because shooting stars come back down, and this is already showing the reversal is beginning because buyers pushed it up and then sellers pulled it right back down, and it closed red because it closed at the low. The next candle opens here and almost always pulls back, and there we have the reversal. So when I'm seeing this candle forming, I'll often take my position before the candle even closes because I can see what's going to happen on the next candle just like this. So in this case, unfortunately, this was going right into the closing bell, so there wasn't a

lot of time to take this trade but nonetheless this is a really nice classic shooting star candle. And it's a candle up outside the Bollinger bands so that's really a nice one. So here's another one, MAA. This one, strength candles are up outside the Bollinger bands but not showing a reversal candle just yet so something we would keep watching. CVS we already looked at that. CYCC this one, okay so there you go classic big red candle high volume red that's reversal indicator candles outside the Bollinger bands RSI above our upper limit so this candle right here is the one really confirming that we're too extended and we start to pull back all right so that was a good one candles up outside the Bollinger bands sometimes as a beginner Trader it can be hard to time momentum and you'll feel like you're just chronically chasing now you can avoid that by learning some of these traditional Candlestick patterns that momentum Traders use for instance we have green

candles getting bigger in size, followed by two small red candles, and then the next candle that makes a new high. Right here, a squeeze back up. Let's say on this candle, you saw a bottoming tail just like that. We know that the bottoming tails are bullish because the buyers push it back up, whereas the topping tails are bearish because the sellers pull it back down. So a pattern like this is a momentum pattern that I would feel very comfortable trading. But sometimes as a beginner, it could be hard to kind of see this and to act in real time. And some beginners like looking at um reversal charts and reversal setups because when you have a setup, let's just say for instance, um where you've got I don't know like 15 to 20 consecutive candles like we're getting really really really extended, this is where it starts to feel like this is a no-brainer that this thing is going to reverse. So this reversal scanner right here has two columns for consecutive candles. So here's one that this had 14 consecutive.

candles. All right, let's match up chart. Okay, so in 14 consecutive candles, okay, you see something like this with 14 consecutive candles, and you're just thinking it's only a matter of time before we reverse, and the first red candle likely will lead to a series of several more red candles of pullback. So in this case, we're outside the Bollinger Bands. RSI is extended, you know, volume is peaking, so everything looks good on this except that this happened to be at 4m right into the closing bell. And it also just so happened that um the S&P 500 was squeezing up really strongly here into the close as well, which is what led a lot of these stocks to move higher. Uh but but nonetheless, while the rising tide of the S&P 500 will will can lift All Ships, the ones that are the most extremely positioned would be the ones that are the best for the reversal. And we measure that positioning based on looking at technical indicators like the

RSI, MACD is not something that I scan for, but RSI is something I will scan for. So, let's see, we had um Autodesk here, ads, so again, extended here, might have been some news on that, uh, after hours, um, Hodes, there's some, there's definitely some headlines on that. Let's see, um, go back a little further, ffiv, this is another one going into the close. So, all those consecutive green candles though, that's something that I really like to get focused on. So, I think for some Traders, it makes more sense to be shorting something that's extended like this, and it's harder for them to understand buying, even though this right here is a perfectly reasonable momentum pattern. And to be honest, this has a lot more profit potential than shorting this, because if you short up here, your correction point is really just down to the 9 EMA, that's your first profit Target, maybe VWAP. So, there's more profit opportunity, I think, momentum trading than reversal trading. But sometimes for a beginner Trader, learning to trade

reversals, and just scalp 10 or 15 cents off of them, can be kind of an easier strategy to kind of break the ice way with. So anyway, so now let's look at some RSIs to the downside. So, um, Lotus technology. This is one where although the RSI is two, you can see that it's not really a pattern that we would work with. Ln RSI is six again on this one. Um, it previously has shown a couple of spots where you've had lower RSI and candle's been outside the Bollinger bands. Low RSI candle outside, sorry, low RSI candle outside the Bollinger bands inverted. Um, but that's not the current position right here. The candle's not outside the Bollinger bands. These also, um, it's worth noting, are going inverse to the overall market. Overall market's really strong, so none of these are really looking like, you know, super strong patterns, a big drop there, but hard to say. So these don't happen to be set up.

right now, this scan right here is just searching for the RSI extremes. This scanner adds in a ton more criteria. So, this is the one where we've got the consecutive candles, and we're kind of filtering it even more to look for some of those really strong setups. You can see this is a scanner that's running pretty much all day long. There was a long one there, PLNT. So, yep. So, that long stretch of consecutive candles. I just have always really liked that kind of setup of looking for 10, 15, 20 green or red candles in a row, and then looking for that first candle to reverse and go the other direction and get that spring back up. When you take that kind of trade, for me, my stop is always at the high or the low of the move, so my stop is very well defined. And then using these additional indicators like RSI and Bollinger Bands can really help with that trade.

say, as a beginner trader, if you're watching this episode, you want to learn more about technical analysis and candlestick patterns. I'm going to put a link to a PDF that you can download. It's a 112-page PDF that's going to break down my favorite candlestick chart patterns. These are multi-candlestick chart patterns. For those of you guys that haven't already downloaded, make sure you click the link below, download, print it out. You can put them next to your desk. And what I want you to do is I want you to put the ones that you are most in favor of, that you love, that you want to really focus on, right next to your monitor. And then when you're watching your charts like this, I want you to compare the pattern of the ones that were resolved correctly to what you're looking at. So if you're focusing on doing um reversal trades, just for instance, then what I think you should do is you should have an ex a few examples of some of the best reversal setups that

actually worked out because when we're looking at these patterns, we're looking at the beginning of the pattern. We don't see the whole thing yet, right? We won't see the full pattern until it's over. So, we, you have to be able to visualize what's going to happen next. And by seeing this many green candles in a row, you'll start to get good at recognizing, okay, what's going to happen next. On this, you know, we're going to see this reversal correction, right? So, um, you know, this kind of move, candle outside the Bollinger bands or really extended, this is what you're looking for, those extensions and the move back down. So, the more of those patterns you have printed out, they'll help you in real time with that pattern recognition. Then you'll see this and you'll know, all right, all I'm waiting for is that first candle to close red, right? And then, boom, that's your short. Stop is at the high. Or if you're in the case of looking at somebody that's been selling off for a

long time. It's that first candle to go green. Use RSI. Use your Bollinger bands to help you time these reversals. For those of you that are focusing on momentum trading like me, you're going to find most likely that RSI is not going to be super necessary when you're trading with the trend. The only area it's going to be helpful is when you're looking at the um, when they deviate, when you have a divergence. So when the RSI is when the price is making a new high and the RSI begins moving down, that's the only time it can be helpful. But what I'll remind you is that with technical indicators, they only work if you're using them on every single trade. So if you have ADD 50 indicators, you've got to check it on every single trade. Otherwise, you're going to get inconsistent results. So for me, I want to sort of avoid analysis paralysis of having too many technical indicators on my chart and try to keep it relatively simple for that.

reason RSI doesn't currently make the cut for my momentum trading strategy. But as a beginner Trader, if you feel like watching it is doable and helpful for you, then there's no reason not to use it because ultimately as a beginner, you need a few extra checks to make up for the fact that your experience and educated intuition are not yet refined. So lean on some of those indicators early on as you're getting started. And hey, as always, if you found this episode helpful, I hope you hit the thumbs up and I hope you subscribe to the channel for more episodes about trading strategy just like this. I'll see you for the next upload real soon.

The Ultimate Relative Strength Index (RSI) Trading Strategy

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Using RSI for Predicting Reversals in Trading

RSI is an established trading strategy that can increase accuracy in predicting reversals when combined with Candlestick patterns.

The RSI oscillator ranges between 0 and 100, with values above 70 and below 30 indicating extreme levels and potential reversal points.

Trading in non-extreme RSI ranges is unlikely to result in enough volatility to generate profits, emphasizing the importance of focusing on extreme levels for reversal timing.

Using RSI and MACD for One-Minute and Five-Minute Trading

The RSI and MACD indicators can be used for trading reversals and momentum, with a focus on the one-minute and five-minute time frames.

It is important to pay attention to RSI divergence, where the price is moving in the opposite direction of the RSI, as this can indicate a false breakout.

The MACD crossover is a signal to be cautious with second attempts for a move higher, and a double top pattern on the chart can also suggest a potential reversal.

Analyzing Stock Movement with MACD and RSI Indicators

The stock experienced a steep pullback, causing the MACD crossover and the RSI to trend down, indicating a false breakout and a no trade situation.

As the price recovered, the MACD turned positive, and the RSI showed an upward trend, signaling a potential trade opportunity.

The stock made a significant move upwards, but a divergence in the MACD and RSI at a new high suggested a possible reversal trade.

Analyzing Stock Trends with MACD, RSI, and Bollinger Bands

The speaker discusses the MACD crossover and the RSI's movement, emphasizing a preference for trading above the volume-weighted average price.

They also point out the impact of retail brokers coming online at 7:00 a.

Additionally, they highlight the use of RSI and Bollinger Bands in a scanning strategy to identify stocks at extreme RSI levels and outside the Bollinger Bands for potential trading opportunities.

Analyzing Stock Trends with Bollinger Bands

Stocks outside the Bollinger Bands typically lead to a short-term correction back within the bands, as shown by the example of a shooting star candlestick pattern.

The presence of reversal indicator candles outside the Bollinger bands and high RSI can confirm that the stocks are too extended, signaling a potential pullback.

Learning traditional candlestick patterns can help beginner traders time momentum and avoid chronically chasing the market.

Candle patterns can indicate momentum or reversal opportunities in trading.

A series of consecutive candles can signal a potential reversal, especially when outside the Bollinger Bands and with extended RSI and volume.

Technical indicators like RSI are used to measure the positioning for a potential reversal.

The choice between momentum and reversal trading depends on the trader's experience, with momentum trading offering greater profit potential but being harder for beginners to grasp.

Scalping small amounts from reversals can be an effective strategy for beginner traders.

Looking for RSI extremes and consecutive candle patterns is a key part of the scanning process for strong trade setups.

Utilizing technical analysis and candlestick patterns, such as those outlined in a downloadable PDF, can help traders identify favorable setups for reversal trades.

Mastering Pattern Recognition for Trading

Recognizing patterns early is crucial for predicting market movements and making timely trades.

Using tools like Bollinger bands and RSI can help identify reversal points and maximize trading opportunities.

While experienced traders may not rely heavily on RSI, beginners can use it as an additional tool for making informed decisions.