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- 1 year ago
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00:00Okay, welcome to this video on RSI.
00:05The first thing you should know with all my educational videos is these are never scripted.
00:13I don't like scripted education. I like free-flowing education with just a discussion.
00:19So I'll try and keep the points as kind of tight as possible.
00:23So I don't try and waffle on too much about other things.
00:26I'll try and keep to the point where possible.
00:28I want to go over today basics of RSI, what I'm looking for in RSI.
00:32And primarily what we'll do for this video is we'll look for divergences.
00:36Okay, we'll go into more detail later on around, you know, RSI and other uses.
00:41But today's video is about divergences.
00:43So the first thing I want to cover off is RSI divergences are an indication of when the market is turning around.
00:49Okay, it's an indication of when we're seeing momentum from whatever direction up or down start to fade.
00:57And what we're looking to do is when we play into divergences, we're looking at taking advantage of when that momentum is turning and trying to get on board with that potential swing around in the price action.
01:11So what we're looking at is is two things.
01:14Okay, we've got bullish divergences, which is where price makes a higher high and our indicator, our RSI makes a lower high.
01:25And that's our first. This is the the sorry, the bearish divergence.
01:30Jesus Christ, good start.
01:33So this is the bearish divergence price makes a higher high.
01:37RSI makes a lower high.
01:39And then what we get is the bullish divergence, which is when price makes a lower low and RSI makes a higher low.
01:49Okay, so these are the scenarios that you get divergences in you get a bearish divergence when we get higher highs and lower highs and you get a bullish divergence when we get lower lows and higher lows.
02:02These are the two scenarios that you should be aware of.
02:05All right, hidden divergences.
02:07I don't touch.
02:09Okay, I do not like hidden divergences that will become apparent to you as we continue the discussions around RSI and its usage.
02:16Hidden divergences very often put you on the wrong side of the trade.
02:20They put you against the momentum that is actually coming through and it usually causes you to ignore some very clear bearish divergences or bullish divergences when trading into them.
02:28So I don't like them and we'll cover that off in more detail later on.
02:33So two types of divergences bullish and bearish.
02:36And what we'll do is we'll take a look at now what structure we want to see for divergences and what we're looking for in terms of confirmation.
02:44Worth noting at this point as well that the RSI that I'm using here is always the standard.
02:49It's always default RSI, which is a 14 period RSI.
02:53When we talk about 14 period, what we're talking about is basically it looks back over the last 14 candles to produce the data set that we get from RSI,
03:02which is why when we discuss the candle rule in this video, it will link back to that RSI description.
03:08So we're going to current action for BTC.
03:11I'll get a clean chart up so we don't have to worry about any mess on here.
03:16And we'll take a look at some of the current price action that we're seeing on BTC.
03:22So let's start off with a nice bearish divergence, a nice bearish divergence that we see.
03:31What one do I want to take?
03:32What's the cleanest one that I can see here?
03:34I mean, there's a couple along the way.
03:44I just want to see if there's any more that are better examples.
03:51And we'll probably take this one here because this one is probably the best one that I have access to.
03:56It's easy to demonstrate and gets across the key points.
03:59So what we're looking at here is the higher highs and the lower highs in RSI.
04:07OK, so what we've got here is a really, really clear and clean divergence.
04:13And we'll discuss what makes it that now.
04:16First thing to say is when we're mapping out divergences, we always use candle bodies.
04:21We use the candle closes to do so.
04:23Wicks are irrelevant to us when it comes to divergences.
04:26OK, so no Wicks are ever included in divergences because it's not how the data for RSI is produced.
04:35And so we don't want to use Wicks because it doesn't form part of the data.
04:39And one way of always confirming if your divergence is logistical or not is making sure that you're swapping to a line chart.
04:46The div should be present on the line chart the same way it is on the candle.
04:51And it has to look the same on both because we care about the closes.
04:55OK, so what we've got here is that bearish divergence.
04:59We've got the higher high in price up here and we've got the lower high here in the RSI.
05:04Now, what's important about this particular region?
05:07Let me just hide everything else for now so we can keep this nice and clean here.
05:10What's important about this region here is two things.
05:16Number one is the number of candles taken to form this divergence.
05:20So what we need is that the length of time between our first high and our second high does not exceed 14 candles.
05:29And we've already discussed why, because I look back period is 14.
05:33OK, so we need to make sure that the RSI itself is looking back at the right price points.
05:40If we start to extend over 14 candles, we'll come on to that in a later video, but it starts to skew things for us slightly.
05:48So what we're looking for is the first high and the second high to be formed within 14 candles.
05:54So on an hourly chart here, we know we've got around 14 hours of price action for us to potentially confirm that divergence or not.
06:01And what we see in this region here is a confirmation.
06:05Now, a lot of people always ask, what's a confirmation when it comes to divergences?
06:08How do we confirm that a div is a div?
06:11How do we know when it's locked in?
06:13And what we're looking for is we're looking for the RSI to turn away.
06:16And I'll show you why now, if I take this back actually a little bit, a little bit more here.
06:22Let me take it back just to this candle here.
06:26So what a lot of people do is they look at situations like this and they say, shit, looks like a div.
06:32Looks like a div here and here.
06:34And this is a classic mistake when it comes to RSI usage.
06:37Because what you are doing here is you are assuming that price turns around at this point.
06:42Because if you take a look at the position of the RSI, there's no reason to stop RSI going higher here.
06:49The market is aggressively moving upwards.
06:52There's nothing that really stops RSI from continuing upwards at the same time.
06:56So you see the way that there's no confirmation yet that price is going to go down or it's going to turn around.
07:03Or for what's important for us here, it's going to create that second high and start to turn away.
07:11Because right now, this is still I refer to it as always price in action, right?
07:15It's always it's moving.
07:18So we can't do anything with this yet because the price is still moving higher.
07:23It's still doing its thing.
07:25There's no confirmation yet that says this is where price is going to stop and turn around.
07:29So you're safe to enter a position here.
07:32Now if we progress here, see you get this candle.
07:36And now that original div that you mapped out here and here is now looking really rough.
07:42Because you would have been stopped on this position.
07:44There's probably no way that you would have survived this if you were trying to play a nice stop on this.
07:49And you've now been taken out of your position.
07:51But what's worse is you're taken out of your position just before we do lock in the RSI divergence here.
07:59Okay, so you've stopped out.
08:02Now what we've got here and what you can see that's a very clear difference is look at this peak that's formed here on the RSI.
08:10So look at the peak that forms here with this red candle.
08:14The RSI shifts back and locks in this high.
08:21So what we're looking for is always a movement back down or back up in RSI depending on if we're looking at a bullish or a bearish divergence.
08:31If we're looking for a bearish divergence, we want to see the RSI move back down towards that 70 level and back inside the normal range of RSI.
08:42If we have the bullish divergence, and we'll look at that in a second, we want to see RSI tick upwards and head back towards 30 and back into that normal range of RSI.
08:53That's what we're looking for in order to say we've got a confirmation here that we're happy that this high is kind of locked in and that we may see movement away from it.
09:01I'll add this point in here, which is that typically we always want to take divergences that are operating within the extremes of RSI, which means that we want to be looking for bearish divergences that are occurring above the 70 level.
09:20And we want to look for bullish divergences that are occurring below the 30 level.
09:25We always primarily want to be operating in the extremes of RSI.
09:30OK, so what we've got here now is our lock in.
09:33We've got our confirmation, which means that we can enter a position.
09:36We're happy to enter in a position in this.
09:38But how do we enter positions in RSI?
09:40How do we enter positions utilizing this as an indicator method for us?
09:43Well, one of the things that we have to do in these situations is we have to think about what happens if the div continues?
09:49What happens if we extend to the upside but continue to lose momentum?
09:53So what we need to think about is the way that we can position into this.
09:56And very often what we're looking at doing is scaling into an entry.
10:01So what I kind of, you know, advocate for anybody using RSI is always take 50% to your entry on a confirmation of a divergence like we've got down here.
10:09We take 50% of our entry here.
10:12And then what we do is we add into that once we get a confirmation that price actually wants to move lower.
10:17So we take our extra 50%, we bring our average down and then we can slide our stop to a nice high.
10:22Now, the reason that we do that is because very often, and you'll see this in the future and in future videos, is that price likes to make another leg higher.
10:30We very often get triple divs. You may have heard them referred to as triple drives before, which is where essentially we make three legs.
10:38Each one of the legs drops in momentum and then we finally sell off.
10:42And so something to be aware of.
10:45And we take 50% of position.
10:47The other reason that we take 50% of position at times like this is because whenever we take divergence based trades, we are countering the trend.
10:59In the vast majority of instances, we're going counter trend because now we're shorting Bitcoin after it's moved heavily to the upside.
11:08So you see, we have to protect ourselves there.
11:10We have to make sure that we don't just enter 100% of our position because we're trying to get into a move when prices starting to fail and momentum starting to fail.
11:22You imagine this like fighting, right?
11:25You're in a boxing match and you maybe sense that your opponents getting tired and you can see that tiredness creeping in.
11:36But suddenly your opponent can hit you with that sucker punch, right?
11:42He gets that second, that second wind and he comes back and strikes you.
11:47And you, you dropped your guard for a second, sensing the tiredness and they capitalize exactly the same as price.
11:55We're sensing the tiredness in BTC and it's upwards move here.
11:59We're looking to try and counter that and get involved, right?
12:03Start throwing our punches and we've got to be prepared that, you know, BTC may have enough juice in it to get another leg out of this.
12:17So we're always better to take a smaller starting position and add on the way down when the trade moves in our direction.
12:23It's always the better play.
12:26So we see in this instance now, if I just take price forwards, what we start getting is a clear confirmation that we're now moving back inside.
12:35Price is responding.
12:37We can start to see where this goes to now.
12:41Now, the other thing to be aware of in a situation like this is very often is what we'll be looking for is how do we know when a divergence is played out?
12:52How is it possible to know when a div has played out?
12:57There are a couple of ways that we can try and do this.
12:59A couple of ways we can try and sneak in some additional information.
13:02A lot of this is going to come down to you and your testing.
13:06OK, it's going to come down to you in the way that you're going to be able to assess and analyze and want to utilize RSI.
13:11One of the things that we can utilize is we can utilize what we call end to end plays.
13:22And what we're talking about from an end to end play is we have RSI moving from the one extreme to the other extreme.
13:30And we can see it down here on PTC.
13:32This is an end to end move.
13:34RSI moving from the lower extreme to the upper extreme.
13:37OK, we can see it here.
13:41RSI moving from the upper extreme down to the lower extreme.
13:44So now we can take that as our potential for divergences and divergence play outs.
13:51The other thing that we can do, and that's irrespective of timeframe, by the way.
13:56I want to make that point clear and I haven't done so far.
13:58You know, this is irrespective of timeframe.
14:00If you're utilizing this on a lower timeframe, it's the same process.
14:05The other thing that we can do is we can look for any sign of momentum.
14:11So if you think about it, we're countering the trend.
14:15We're going against the trend and what the trend is saying.
14:19And we're looking at taking advantage of the weakness and the tiredness.
14:23And what very often happens in that weakness and tiredness is we look at attacking lows in an upwards moving market.
14:32So you can see what BTC here is a good example.
14:35So here, these are the lows that formed.
14:41And these are the lows that formed once the tiredness began.
14:44So we know that this is our divergence.
14:48We know that we've got a lot of price action here.
14:50We've got some lows here and price moves down and takes out this low.
14:53We also saw a significant red candle.
14:56And I'm well aware this is black.
14:58We saw a significant candle down here.
15:01And that's enough for us to close our position.
15:05When we see significant moves, strong moves in the direction of our trade, that can be enough for us to close our divergence play.
15:14On the higher timeframes, that might be different.
15:17When we get three day, weekly, monthly divergences, they can very, very usually indicate a trend reversal.
15:24Lower timeframes, we tend to take the edge off any moves.
15:29Higher timeframes can be full trend reversals.
15:32So let's play on and see what happens here.
15:39Okay.
15:40So at this point here, obviously, we want to be out of the position.
15:42So what we've done is in this, we can add in our third potential closing mechanism.
15:50All we've got in this situation is we can take our money on the impulse, which is very important to consider.
15:55And remember, all of these options are down to you.
15:58They're down to you and the way you want to trade and how you want to implement it.
16:01We've got our close based on the strong sell off candle or the strong buy up candle if you're playing a bull div.
16:08We've got our close potentially based on RSI traveling down to the bottom.
16:12Didn't happen in this instance.
16:14And then we've got our close based on the RSI crossing back over the 50 level.
16:19And the reason that we take it on a break back above the 50 level in a short position is because that's where the momentum kicks in for the bulls again.
16:29So this level here, the 50 level is a bull in a bear line.
16:33We're bullish above it.
16:34We're bearish below it.
16:36So we want to see the bears continue to drive price down.
16:39They didn't manage to do that.
16:40We break back above.
16:41We have to close our position.
16:43OK, so a couple of closing options in there for us.
16:48Let's exit this and we'll get back to current price action.
16:51We'll take a look at the action here.
16:55Let me just sort out my my FTX stuff, you know, just doing a bit of just doing a bit of trading while we're recording a video.
17:16OK, so that's that's the basis of the bull div in that example.
17:26Now we've actually got quite a nice RSI div here on BTC for the hourly.
17:35And this was kind of a cool one because we had a discussion which was really, really good in the group yesterday.
17:40It was a really good discussion to have.
17:42So, you know, I wouldn't name names, but we had a, you know, a member who posted a chart and said, you know, isn't this a div?
17:50And I said, we'll wait and see, you know, wait and watch what the price action does and then come back and tell me what your thoughts are of it.
17:57So instead of me just saying yes or no, you know, let's let's have an ongoing discussion around what we think the price action is doing.
18:04And it was right down at this cluster.
18:09OK, so the individual in question was essentially looking at this and saying, well, you know, from what I can see here is a little bit further on.
18:20All right, from what I can see here, we've got a we've got a div forming here and here.
18:29And this is that exact situation that I was referring to with the bearish divergence, which is where we can get into a position where we're anticipating too early that the div is developing.
18:41And like I said before, we can see here that the price action isn't done.
18:46We're not ready. We haven't we haven't confirmed that we're going to go back up.
18:50OK, so we need to wait.
18:58We need to wait and see what the price action does.
19:00And I said that I said in chat, wait, wait and see what happens and then watch what happens.
19:06OK, everything still looks OK.
19:10And again, you'd start to have a little bit of kind of maybe confirmation here at this point.
19:16We've now got a strong green candle and we started to take RSI back up.
19:23That's the cell.
19:25OK, so the cell takes us through that level.
19:30And now we start to recover, but now we're in a position where things get really awkward.
19:34Because things get awkward now because we've got, well, this low here.
19:40But if we do it like this, then from this low to this low, we've got a div.
19:46But what about this?
19:47What about this here?
19:48Because actually, if we go from this low, this is actually a lower low.
19:52So actually, this is just continuation of the structure between here and here.
19:58So in these situations, this divergence is not clear for us.
20:02It is not a clear divergence.
20:05OK, what we get from this is a strong move to the upside.
20:08And we get a nice little bounce through here.
20:11But this is not a clean divergence because you can see it gets awkward.
20:16Now, how do we avoid getting into this situation?
20:18Well, we can look at operating in the extremes.
20:21So like I said, we only look at taking trades once we're in the extremes of RSI.
20:26You know, we don't need to we don't need to mess about with RSI when it's not in the extremes.
20:31It's not in the extremes here.
20:34We simply don't need to take a position.
20:37We just wait.
20:39It's just a non-trading situation for us.
20:41A couple of things to add to this.
20:47All right.
20:48I don't want to draw this out.
20:51I'm only looking at I'm only looking at RSI here.
20:54So everything I draw here is just going to be RSI.
20:56OK, if we are looking at bullish divergences and the price action looks like this.
21:06The RSI looks like this.
21:09Small gaps between RSI.
21:13OK, small gaps here as opposed to gaps like this are poor divergences.
21:22OK, these are poor divergences.
21:24What we want to see is a good amount of time passing between each of the legs on our divergence.
21:32So remember, we've got that 14 candle rule.
21:35And ideally, we'd like to be up at 10, 11, 12, 13, 14 candles.
21:40We don't like tight divergences.
21:43They are very ineffective.
21:45Tight divergences like this.
21:50Let's say this is the one hour time frame.
21:54OK, let's say this here, this picture of RSI is the one hour time frame.
21:59I can almost guarantee you that if you went to the 15 minute time frame,
22:05your divergence would now look like this.
22:09Tight divergences are usually indications that the actual div is taking place on a lower time frame than what you're looking at.
22:19So when you swap from the hourly to the 15 minute, you will have a nice clean div to play.
22:25But what that means is obviously you need to be more aggressive because you're playing a 15 minute div versus an hourly div.
22:31So this is a more aggressive trade.
22:33Tight divergences.
22:36Bad.
22:38Right.
22:39Poor, poor setups.
22:41Swap to a lower time frame.
22:42Good setups.
22:43Good setups.
22:44But the reason they're good setups is because they come with different parameters.
22:48They come with more aggression in taking profit.
22:50They come with different levels.
22:51They come with different entries.
22:52OK, I hope that's clear.
22:56Now, the other thing that we've got, and I'll do this again as a bullish divergence, is sometimes we see divs that look like this.
23:08Long divs, right?
23:10Really long divs.
23:12So we start to see things that look like this.
23:16And let's see, we've got this here.
23:18OK, so we've got really long div on the 15 minute time frame.
23:22This is RSI.
23:25If you've got a situation where you've got these kind of triple divs or a long period of time where you can clearly see that higher lows are being made.
23:34Swap to a higher time frame because I can guarantee you that a higher time frame will look like this.
23:41All right.
23:43So what you'll end up doing is this is the reverse of that example we just looked at.
23:46In this situation, when you've got long, expansive divergences, switch to a higher time frame because this is usually indicative that the play is relevant on a higher time frame, which again enables us to trade our setup, play a really strong hourly divergence instead of a 15 minute divergence, which once again changes our parameters, how long we can hold the position, what we might look for in terms of targets and the way that we may assess from that point onwards.
24:13And, you know, to further exemplify this, this is the this is the three day BTC chart.
24:24Right. This is exactly what happened here.
24:26So look at BTC chart here.
24:29Look, we can see the momentum drop in each one of these is a clear lower high, but it extends way too far to be a normal divergence.
24:38We swap it to the weekly.
24:39We swap it to the weekly.
24:40What do we see?
24:41Far cleaner div.
24:42So you see the way that we change time frames.
24:44We identify that we can see something on the three day that looks like a divergence here because the way we're losing momentum each on each of these highs.
24:53So we go to a higher time frame and there we see the cleaner divergence on the weekly.
24:59All right.
25:00That's the way we play this.
25:02That's the way we play these situations here.
25:04Let me see here the daily.
25:06See if we can get this one.
25:08Let's go back to maybe here.
25:11Let's just have taken place May 2019.
25:23Yeah.
25:24Okay.
25:25So a really good example here is on the daily.
25:26So we can see this high, this high and this high.
25:29They're all lower highs on the daily.
25:31So we can see those peaks are lower.
25:33We swap it to the three day.
25:36Okay.
25:37And we've got a very clear divergence here between this high.
25:41Here and here.
25:43Here and here.
25:45So you see the way we get those elongated divergences either to the upside or the downside.
25:50And by swapping time frame, we get a far better picture of what's going on.
25:58RSI is all about learning how RSI functions, learning how divergences function.
26:05If you can do that successfully, then you will be able to integrate divergences as part of your system.
26:11Today's discussion is really an introduction to that.
26:14How do we start thinking about those divergences?
26:16What are we looking for?
26:18How do we, how do we, you know, determine a valid divergence versus an invalid divergence?
26:24And I've gone over some of that criteria today for you.
26:27Now, this will be the first in a series of videos on RSI and its utilization, because RSI is not just all about
26:34divergences.
26:38As I've said, RSI is a measure of momentum, and there's multiple ways that we can use momentum.
26:43We can use momentum to plan breakout trades.
26:46We can use momentum in order to determine where potential bottoms or tops may be forming.
26:51So we can use momentum and RSI for a whole range of things.
26:55It's not just divs.
26:56But today is a first taster into that world for you.
26:59And we'll cover off more and more as we go on in my time here.
27:02If there are any questions on anything that I've covered off in this video, then please just let me know and I'll be happy to answer those.
27:11And thank you for watching.