Mastering RSI: Advanced Techniques for Reversals and Trend Confirmation

RSI has gained popularity because of its capacity to detect divergences alongside overbought and oversold levels. However, in a challenging environment like the crypto market, bearing a diverse set of techniques to read the price and analyze charts on distinct methods is something every trader should consider on their way to professional crypto trading.

RSI is an oscillator that allows traders to exploit distinguished methods even when they seem to be opposed, such is the case for positive and negative reversal signals to address pullbacks to seize a trend continuation, or failure swings that present opportunities for actual price reversals.

After reading this article, which discusses both methods, crypto traders will be able to try two new refined ways to use RSI, that can test on paper trading to create advanced strategies or trade live directly.

RSI: An Inside View  

The Relative Strength Index (RSI) is a widely used oscillator for technical analysis to gauge the momentum, velocity, and magnitude of the price fluctuations of financial instruments.

RSI calculates the average loss and wins over a period, typically 14, to measure the strength of those fluctuations, represented by a moving average line that oscillates between a scale of 0 to 100.

Such oscillation indicates the weakness and strength of the price momentum of a crypto asset. As the RSI line heads to 100, it suggests stronger momentum, but when it moves near 0, the price is weaker at a certain level.

One of the primary uses of RSI is to spot overbought and oversold conditions in an asset quotation. When crypto oscillates around 70 and 100 on the scale, traders interpret an overbought condition. Otherwise, values ranging between 30 and 0 indicate an oversold state.

Other uses belong to divergence strategies that seek reversal opportunities in a trend. Likewise, RSI can help traders confirm trending markets as they emerge and the price fluctuates within momentums and pullbacks.

Divergence: Reversal Or Trend Confirmation?

Typically, technical analysts interpret the divergences as a signal for a reversal, forecasting the end of a trend. However, this is not the only possible understanding of divergences.

An advanced manner of using divergences is to confirm trends. This way was discovered and proposed by Andrew Cardwell, a student of the RSI creator J. Welles Wilder.

He noted that, as bullish divergence may only emerge during a bearish trend and bullish divergence may only occur during a bullish trend, often both cases lead to a price pullback but not a precise trend reversal.

Practically, traders can seize divergence signals as trend confirmations rather than forecasting reversals. At this point, it would be appropriate to review divergences to understand better how this approach works.

As noted before, RSI can detect two types of divergences:

• Bearish Divergence: When the price makes a new swing high, though the indicator makes a lower high.
• Bullish Divergence: When the price makes a new swing low while the indicator makes a higher low.

When the price of a cryptocurrency is heading in a direction, traders may not know the asset is trending until it has already done the movements. Such a situation represents a challenge for the analysis when identifying a trend.

So, under Cardwell's proposal use of RSI, as long as an asset is in a trending market, a bearish divergence would confirm an actual uptrend, and a bullish divergence would guarantee the existence of a downtrend.

The Opposite of Divergence: Positive and Negative Reversal

Another relevant perspective is using RSI signals under positive and negative reversal viewpoints. In this case, to spot potential reversal movements.

Positive and negative reversal are also concepts proposed by Cardwell's discoveries. These ideas oppose divergences in the following ways:

• Positive Reversal: It will only appear during an uptrend when the price makes a higher low, but the indicator makes a lower low, proceeding to an increase in price.
• Negative Reversal: It will only appear during a downtrend when the price makes a lower high, but the indicator makes a higher high, proceeding to a decrease in price.

These two concepts may be suitable after confirming a trend. Traders can seize a bullish trade entry following a positive reversal or strive for a bearish trade opportunity on a negative reversal.

In the same way, these two reversal signals, alongside trend trading strategies and pullbacks, can provide traders with a procedure to confirm trading decisions.

Advanced Reversal: Failure Swings

Failure swings present traders with an advanced technique to look for reversal opportunities, whether for the bullish or bearish side. An essential aspect to remark from this method is that it depends only on the RSI indication regardless of the price behavior.

It consists of four movements made by the oscillator line, which eventually end on a breakout of the second movement that presents the reversal signal. These four movements should be as follows.

Bearish Failure Swing

1. RSI advances above 70 to the overbought level.
2. RSI declines back below 70.
3. RSI climbs barely and stays below the overbought level.
4. RSI falls lower than its previous low made in the second movement.

Bullish Failure Swing

1. RSI advances below 30 to the oversold level.
2. RSI jumps back above 30.
3. RSI retraces but is still above the oversold level.
4. RSI ascends higher throughout the previous high made in the second movement.

As we see, spotting failure swings is similar to analyzing price breakouts in a market structure. Indeed, this technique displays a structure as the RSI line assembles the four movements explained previously.

Conclusion

The Relative Strength Index is a versatile indicator that can allow readings of the price chart beyond its popular applications based on overbought or oversold levels and divergence strategies.

By detecting positive and negative reversals, traders can anticipate the continuation of a trend and seize pullbacks on it. In failure swing cases, RSI provides traders with a distinguished method to forecast an effective price reversal.

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