The Biggest RSI Mistake Traders Make
45sWarns against a common, dangerous misconception about RSI, sparking fear and curiosity.
▶ Play ClipAI Summary
This video teaches traders how to use the Relative Strength Index (RSI) effectively, warning against the common mistake of trading solely on oversold/overbought signals. It presents two main strategy types—reversal strategies using divergences and continuation strategies using the 50-level crossover with a stochastic filter—and emphasizes confirming signals with price action.
Chapters
[00:15]
Common RSI Mistake
Traders often buy when RSI is oversold and sell when overbought, but price can continue its trend, leading to losses.
[01:09]
RSI Definition
RSI measures the strength of price variation, indicating trend direction and strength, enabling reversal and continuation strategies.
[01:34]
Reversal Strategy: Divergence
Divergence occurs when price moves opposite to RSI, signaling potential trend reversal. In an uptrend, a lower high on RSI indicates bullish exhaustion; in a downtrend, a higher low indicates bearish exhaustion.
[02:44]
Confirmation with Trendline
Do not enter immediately on divergence; draw the immediate trendline and wait for price to break it, ensuring price and RSI share the same bias.
[04:10]
Divergence at Support/Resistance
Use RSI divergence at support/resistance zones to confirm exhaustion, then enter on trendline break.
[05:27]
Continuation Strategy: 50-Level
Change RSI parameters to 50; crossing above indicates strong uptrend (buy), crossing below indicates strong downtrend (sell).
[06:07]
Adding Stochastic Filter
To reduce false signals, add stochastic oscillator. Buy: stochastic crosses up in oversold zone and RSI crosses above 50. Sell: stochastic crosses down in overbought zone and RSI crosses below 50.
[07:07]
False Signals in Trends
In downtrends, RSI touches oversold often, generating false buy signals; in uptrends, it touches overbought often, generating false sell signals. Avoid trading solely on these levels.
The key takeaway is to use RSI not as a standalone signal but as a confirmation tool alongside price action and additional filters like stochastic, and to always wait for trendline breaks before entering trades.
Mentioned in this Video
Tutorial Checklist
1
01:34
Identify RSI divergence: price makes higher high while RSI makes lower high (bearish) or price makes lower low while RSI makes higher low (bullish).
5
06:07
Add stochastic oscillator. For buys: stochastic crosses up in oversold zone and RSI crosses above 50. For sells: stochastic crosses down in overbought zone and RSI crosses below 50.
💡 Key Takeaways
🔧
Divergence as Reversal Signal
Explains a core technical analysis concept clearly with examples.
01:34
⚖️
Trendline Confirmation
Emphasizes the importance of confirmation to avoid false entries.
02:44
🔧
Stochastic Filter
Provides a concrete rule to reduce false signals, adding practical value.
06:07
💡
False Signals in Trends
Warns against a common pitfall, reinforcing the need for confirmation.
07:07Full Transcript
[00:00] Do you use the RSI like this?
[00:15] watch out! that is a perfect strategy to lose your account. A very common error in traders is think that when the RSI reaches the oversold level the price will automatically turn to the
[00:27] up, taking buy positions, and when the RSI reaches the overbought level they think that the price will automatically turn down, opening positions for sale, be careful! If you make a buy trade only because the RSI is at the oversold level
[00:44] the price can stay in a range and then follow its downtrend, in the same way if you open a short trade, just because the RSI is at the overbought level the
[00:56] price can continue its upward path, if you stay until the end you will meet various effective strategies using the RSI indicator, the relative strength index, measures the strength of
[01:09] variation of the price indicating the direction and strength of the trend, in this way we can generate two types of strategies, we can generate reversal strategies, if the RSI shows exhaustion in the
[01:22] trend and we can generate continuation strategies , if the RSI shows strength on the trend, REVERSAL STRATEGIES... to watch price exhaustion on RSI
[01:34] we will use the divergences, the divergence occurs when the price moves in the opposite direction to the RSI, which can be used as an early indication of a possible trend reversal, in
[01:46] this uptrend, the price makes a higher high, but on the RSI it made a lower high, the RSI indicates bullish price exhaustion, this creates a divergence, which results in
[02:00] a price reversal to the downside, in this downtrend the price made a low lower, while on the RSI made a higher low, the RSI indicates exhaustion
[02:13] bearish price creating a divergence, resulting in a price reversal to the upside. In this example, we see that the price is in an uptrend, as the price is making higher highs and higher lows , RSI shows bearish divergence
[02:31] since I make a lower maximum, indicating a possible exhaustion of the bullish price, without However you should not enter immediately when you see a divergence as we will only use
[02:44] the RSI to support our price action analysis, we will draw the line immediate trend and we will wait for the price to break the line to take short positions,
[02:58] since in that circumstance both the price and the RSI will share the same bearish bias, remember... you should not enter immediately when you see a divergence, as the price could
[03:13] bounce back and continue your trend. In this other example, we have a downtrend the price made a lower low while on the RSI it made a higher low
[03:25] creating a divergence, the RSI indicates a possible bearish price exhaustion, however it does not you should enter immediately when you see a divergence as we will only use the RSI
[03:38] To support our price action analysis , we will draw the trend line immediate and we will wait for the price to break the trend line to take long positions since in that circumstance both the price and the RSI will share the same bullish bias
[03:57] remember... you should not enter immediately when you see a divergence as the price could bounce back and continue its trend. we can also use the RSI divergence in
[04:10] areas of support and resistance, here we see a support for this double touch and rejection of the price to be broken and when the price returns to the level is rejected confirming a zone of high resistance,
[04:25] we will look for signs of exhaustion on the RSI when the price looks to return to the resistance zone we observe that the price reacts to the resistance zone by this red candle and the RSI shows
[04:39] exhaustion, we will enter short when the immediate trend line break occurs since in that circumstance both the price and the RSI will share the same bearish bias.
[04:57] Before continuing, if you want to deepen your knowledge about the RSI indicator I leave you this excel file for you to download for free on our website, just you have to put the closing prices of the asset you want to analyze and if the video
[05:14] is being useful support us with a like, subscribe and activate the notification bell. FOLLOW-UP STRATEGIES... to identify the
[05:27] direction and strength of the RSI trend we will change the parameters to the level of 50 in this way if the RSI crosses above the 50 level, the uptrend is strong
[05:42] and we will look for buying opportunities, and if the RSI crosses below the 50 level, the downtrend is strong, where we will look for short opportunities.
[05:54] However, to greatly prevent false signals, we will add another oscillator which also contains overbought and oversold levels, in this case we will add the stochastic
[06:07] The rules for purchase operations will be the following: 1.- the stochastic must cross in the oversold zone 2.- the RSI should cross the level of 50 on the rise. The rules for operations
[06:22] for sale will be the following: 1.-the stochastic must cross in the overbought zone 2.- the RSI should cross the 50 level to the downside, here we see Stochastic crossing to the upside
[06:37] In the oversold zone and the RSI crosses the 50 level to the upside, we open a buy position. In this other example, we observe that the stochastic crosses downwards in the
[06:50] overbought and the RSI crosses the 50 level to the downside, we open a short position. A very important rule regarding the RSI is that, in a downtrend, the RSI
[07:07] will have more touches at the oversold level, generating false buy entries, that's why You should not enter a purchase just because the RSI indicates overselling, since as we see
[07:19] here the price can continue to fall and the RSI will remain for a long time at oversold levels and then the price will continue its trend. While in an uptrend the RSI will have more touches at the overbought level,
[07:36] generating false tickets for sale, that is why you should not enter for sale just because the RSI indicates overbought, since, as we see here, the price can stay in a range
[07:48] for quite a while while the RSI continues to generate false sell signals, then the price will continue with its trend. If you want to learn more about effective strategies, we recommend this video below. Good trading!
