Many of you love using RSI, or the Relative Strength Index, because of its simplicity and effectiveness in finding strong trends. If you're still using RSI as an overbought indicator and using that to sell, or using it as an oversold indicator as a signal to buy, then you're using it wrong. In this video, we will help you use the RSI correctly to help you maximize your profits. Now, if you're not sure what the RSI is, no worries. We've got you covered too. Make sure you stick around to the end of the video as we've got some strategies to use on implementing the RSI correctly. Let's take a moment and get everyone on the same page as to what the RSI is. The RSI is a single line that will appear at the bottom of the chart. It is bound between the values of zero and 100. RSI is used to indicate the velocity, speed, and momentum of the market.

So, for example, if we see a value that is high like 70 or 80,
well, that simply means that the market is in an uptrend,
and a very strong uptrend. On the flip side, if we see a value
that is down near, let's say 30 or 20, well, that simply means that the market
is in a very strong downtrend. One big mistake
that many of us traders make is that we want to sell
when the market's in an uptrend or we want to buy when the market's
in a downtrend. Part of this could be with the way
that default is set up on the RSI. If we come out here
and take a look at the RSI. It automatically comes
with two lines on the chart: a line at the 70 mark
and a line at the 30 mark. And I think that naturally makes
people want to sell when the RSI line gets above 70, or buy
when the RSI line gets below 30.

but this is incorrect. As we previously stated,
the RSI is a momentum indicator that gauges the strength of the trend.
When the market is strong and in an uptrend, go with the uptrend,
go with the flow. Don't swim upstream
when you can swim downstream. There are several different ways to
overcome this mistake where we want to buy when the market appears oversold or sell
when the market appears overbought. That's where we could look
at different patterns on the chart. We can look for trendline breaks
within the RSI. We could also use a multi-time
frame analysis where we're identifying the direction of the trend on a longer timeframe
and then scaling down to a lower timeframe using RSI when it becomes
overbought or oversold at that time. A strategy that I want to share with you here for the rest of this video
is with regards to divergences. Divergences can be very effective
in spotting reversals within the market.

and because RSI is a momentum indicator,
it will indicate to us when the momentum is slowing to one direction,
and help provide some signals. So what we want to do
is we want to combine those RSI divergences with other price analysis. So let's dig in. There are two types of divergence. We have what we call regular
or classic divergence, and then we also have
what is called hidden divergence. Both of these can appear
in both directions of the market. So you could have bullish or bearish
regular divergence, and you can have bullish or bearish
hidden divergence. So let's start off and let's take a look
first at bullish regular divergence. Now, divergence is in essence,
when the market, the price action, and the relative strength index indicator are disagreeing,
they're moving in opposite directions. And if we take a look at Bitcoin
on a four-hour chart, we have a bit of bullish divergence
taking place because we can see down here

the RSI did not reach this
previous low level. So the RSI created a higher low
while price created a lower low. So this is divergence. This is in essence, the soldiers in
the Army are not following the general. If the general in this case
is price action, and if the soldiers are the RSI, well, the RSI are not following
the general into the battle, and then the general
is going to get slaughtered. As a result, the price ends up
reversing and moving higher. And what RSI is indicating to us in
this situation is that we had really good strong momentum to the downside
that created this local low on RSI. And then after
a little bit of a correction, RSI was not near
as strong to the downside. So the momentum moving to
the downside was not near as strong, and that tells us
that the trend may be about to reverse. So in essence, the price is reaching
a new extreme, but the RSI is not.

Now this can happen in the opposite direction. So as a matter of fact, up here, we've got a situation where we've got price coming up, and it's reaching a new high. But the RSI is not reaching a new high. Each high in the RSI is lower. It's a lower high, lower high, lower high, and then eventually price, the momentum to the upside is so weak that it just falls under the weight of itself, and then price ends up collapsing, and we get a really strong trend, really strong momentum to the downside. RSI reaches very low levels, which tells us it's a very strong trend of the downside. And then again, the momentum slows, and that tells us that price is about to reverse. So regular or classic divergence tells us of an impending reversal. Not every reversal is preceded by regular divergence, but a lot of times you will see regular divergence showing up when the market is about to reverse.

When you do see divergence showing up,
there is a couple of ways that you could trade it. And my favorite way of wanting to trade this would be using
what is called a breakout trade. So let's just focus in on this
bearish divergence from the top. So we have price coming up
and reaching a new high. We've got the RSI
that is not reaching up to new highs. And so there's a couple of ways to do this
from a breakout perspective. And what I like to do is come out
and you find a a midpoint low,
look for a horizontal level of support or resistance. In this case,
since the market was moving higher, we want to look for a level of support. When this level of support breaks, then we could use that as a signal
and a trigger to enter into it. So here we've got a level of horizontal
support. Price broke through this horizontal level of support,
drifted lower, came back, retested the bottom side of it,
and then took off to the downside.

So, there were a couple of opportunities as to where somebody could enter into this position on this large red candle break, placing a stop loss just up above the high, and then looking for a one to two risk-reward ratio, targeting somewhere down here. That's one possibility. Or, even if they caught this retracement, this wick retracement, it could be the same thing. It could have been an opportunity to try to catch that wick using at least a one to two risk-reward ratio. So there are some situations where when you set up a breakout trade, it can help keep you from some losing positions. So let's go back here. The market fell very harshly in that middle of June selloff. And you can see we've got some divergence showing up. We've got a situation where the market created a lower low in price, but the RSI indicator created a higher low. So, that's a divergence, and it's not syncing up, it's disagreeing with the price.

And so, in this situation,
what you could do is you could identify that horizontal level
of support and resistance. Right here,
is a level of horizontal resistance. And you'll notice
that price did come up and rally, drifted
back lower, but never really made it up to that horizontal level
until much further down the road. And so, this is a situation where even though it took a long time for it
to come up here, probably wouldn't want to look at that
as a long entry on that breakout. And that's because by the time price
came through here and reset itself, there really wasn't
any momentum to the upside. If there was momentum to the upside,
it would have gone up and it would have broken
right up through this horizontal box. But it never did
find any momentum to the upside. And then eventually just kind of meandered
sideways. Had somebody taken a position,
it might have worked out, might have not.

but as you can see,
it just was not as good of a situation as it was in these others
where there was an immediate break in price
through that horizontal support. And so you want to look for how quick
the market responds after that regular and classic bullish divergence
or the regular and classic bearish divergence. Now, let's move on to the second type
of divergence, which is hidden divergence. What hidden divergence is,
is basically it's the opposite where RSI reaches a new extreme, but price does not reach a new extreme. And so we have an instance
of hidden divergence right here. This low to the right
did not reach a new price extreme. But when we look at this to the downside,
notice how the Relative Strength Index, the right dip did reach a new low below the left dip. This signals a continuation of the trend. So whereas the regular
or classic divergence was a signal of a potential reversal, hidden divergence
means a continuation of the trend.

So going into this divergence,
we had a trend to the upside. We have hidden bullish divergence, and then
the market ended up continuing higher. The way somebody could trade
this is similar as before. It would be bullish divergence. So you would look for a level of resistance to break.
When that level of resistance breaks, then you can look
to initiate a long position. And so if your entry is somewhere here
inside this box, you could come up here and place
a stop loss depending on how you enter. If you enter on this breakout, you're going to want to place a stop
loss down below this recent swing low. If you're entering
on a retest of this box, you could be a little more aggressive
and tighten up that stop loss. But I'll just leave it down here
for now, and then you'll notice that subsequent price action
easily made it up one to two, almost a one to three risk reward ratio.
So that for every point of risk,

there was at least two points of profit
potential on it. Okay. Here we are taking a look within the month
of May on a four-hour chart for Bitcoin. This is an instance
where price was consolidating sideways and RSI and bearish Hidden Divergence was giving us a clue that we may see
a breakdown here in the price. So you'll notice that after this local low,
we had regular bullish divergence. Okay. New extreme in price,
but not a new extreme in RSI. This signals that the momentum
to the downside has slowed. Well, in essence,
basically what was going on is price was consolidating sideways,
and as price was consolidating sideways, notice
how these high prices were getting lower and lower and lower. As those high prices
were getting lower and lower, we started to see RSI
generating some higher and higher values. So this is hidden bearish divergence, and this suggests that we may see
another price move to the downside.

Now, eventually, prices did drift down
and broke through this support level,
didn't break it by much, but eventually we did see prices
push down through this support level. But still not enough energy
for it to break down. But that could have been our initial clue. There was still some weakness out in the market
as the market continued to drift sideways. Now, if we go back even farther here,
yeah, here's here's a really good example. We've got a situation where prices
are not reaching a new extreme, but we do have RSI just barely
reaching a new extreme value. And so this indicates
that there would be some weakness ahead. And again, this is where you could use horizontal levels of support
and resistance like this. You could also come out
and you could use a trend line connecting these two lows
and then waiting for a break of it here. It both ends up in about the same place
where you would look

to initiate that short position
somewhere around here. And if you place that stop loss up
above the recent swing high, look to target at least twice
as much as the level of your risk. And so you would be looking for a target
somewhere down here. So that would be hidden bearish divergence where the RSI
is reaching a new extreme value, but price is not reaching that
new extreme value. Now, one thing I want to point out to you,
as you're just new into learning this and trying to figure out how to spot this. I've got a couple of tricks
I want to share with you. The first trick, you know,
we spoke earlier in the video about how a lot of charting packages
will use the 30 and the 70 setting, will use that as a level of overbought and oversold,
and it can confuse a lot of people. So there's a couple of things
that we can do to tweak this.

First of all, if we change the source
of our RSI setting, if you use
'ohlc4', open, high, low, close, and divide it by four. The software package
does this automatically. Where that comes in
handy is in these situations where you have some wicks to the upside. Most charting packages
default to just the close. And when you're looking at the close, basically it's just a line chart
that you're looking at, and that's okay. But if you want to get
a little more precise, leave it on a candle,
leave it on a bar chart, but change it to ohlc4, which is the open,
the high price, the low price,
the close price divided by four. And then that gives you the average value. Basically, it takes into account
the wicks associated with each candle. The second adjustment
that you can make to the setting on the actual chart is
you can get rid of the upper

and the lower band,
and just leave the midline. The midline would show up near the 50
and turn off the background as well. So this midline near 50, if we focus in on this, is the hidden divergence
appeared near the midline. And so some traders will use the midline as also a trend direction, a way
to determine the direction of the trend. If RSI is above the 50 value, then
they would consider this to be an uptrend. If RSI is below the 50 value, then
they would consider it to be a downtrend. And so here knows how RSI dipped down to about 25 and then rallied back and really couldn't
rally much up above that 50 level. That would indicate that it's having
a hard time rallying back into an uptrend, and then it ended up falling down
and spending the majority of the next several days
below the 50 mark.

So that's one way
that you could pick up some clues as to whether to look for regular divergence
or hidden divergence. Hidden divergence, a lot of times,
is going to happen around the 50 mark, whereas the regular divergence,
a lot of times, is going to happen near the extreme levels. So there's another tool
that I want to share with you. If you come up into indicators,
type in 'divergence', so it's this divergence indicator. What this divergence indicator can do
every time there is bearish divergence. Remember, we highlighted this before,
bearish divergence. Here's bullish divergence. It will also throw out. So for the inputs 14, let's change this to ohlc4, okay. And then we also want to check the box:
Plot Bullish, Plot Hidden Bullish, Plot Bearish, Plot Hidden Bearish. Okay. And so here's hidden bullish divergence,
here's hidden bearish divergence, and so it will plot every instance
of this showing up on the chart.

Just because it shows up down here,
doesn't mean you necessarily want to trade every instance.
You want to bring into it an element of price action analysis,
wait for level of support or resistance to break, do some trend analysis as well. Like in this instance, here,
we have hidden bullish divergence, but the RSI this occurred
well below down here when RSI was near 30. And so, therefore, the move to the upside
just wasn't as strong. There was a little bit of a trend, but it wasn't as strong
because RSI struggled near that 50 mark. But ever since then, notice that we had
all these hidden bearish signals when RSI was well below the 50 mark. So you want to use that as a means
to couple with normal price action analysis,
using support and resistance levels, looking for levels to break and couple
that with RSI. So that's how you want to use the RSI
rather than just a simple overbought.

and oversold. So as you can see, buying
when RSI is oversold or selling it when it's overbought,
is not a viable strategy. And even using RSI and just
divergences by itself is not a strategy. RSI divergence is a tool
that can help you spot some trades when you couple it
with other forms of price action analysis, and that is looking for horizontal levels
of support and resistance, or even trendline
levels of support and resistance. And if you spot divergences on a reversal,
so let's say it's a regular classic divergence,
and then you see a trend line break. Well, that would be an instance
where you could enter into the position looking for at least a one to two risk
reward ratio. So if you like what you see here,
go ahead, press the like button, go ahead, subscribe, and make sure
you check out our other video. We've got one here on moving averages
and uses that you could use for it.

You are Using the RSI Indicator WRONG! (RSI Trading Strategy Secrets REVEALED)

You are Using the RSI Indicator WRONG! (RSI Trading Strategy Secrets REVEALED)