Top 3 Technical Tools Part 2: Relative Strength Index (RSI)
EWI's senior analyst shows you a beautiful example of how supporting indicators help identify a trade setup in Halliburton (HAL).
by Editorial Staff
Updated: August 08, 2017
"There are many different forms of technical analysis. A completed Elliott wave pattern supported by additional evidence allows for more confident forecasts and higher probability trades."
- Jeffrey Kennedy
Trader and technical analyst Jeffrey Kennedy has more than 25 years of experience using with the Elliott Wave Principle. To support his Elliott wave analysis, Jeffrey says that 3 of his favorite technical tools are Relative Strength Index (RSI), MACD, and Japanese candlesticks.
This 3-part series includes Jeffrey's practical lessons and proven techniques to support his wave counts. In Part 1, we covered Japanese Candlesticks. Today's video clip shows you how RSI range rules can help identify trading opportunities: Part 3 will cover MACD.
This lesson, excerpted from his Trader's Classroom educational service, gives an overview of RSI followed by a video example. Be sure to look below the video for an opportunity to get more lessons from Jeffrey Kennedy.
Buying pullbacks in uptrends and selling bounces in downtrends are great ways to trade trending markets.
Developed by J. Welles Wilder, Jr. and presented in his 1978 book, "New Concepts in Technical Trading Systems," RSI measures the strength of a trading vehicle by monitoring changes in closing prices and is considered a leading or coincident indicator. Andrew Cardwell popularized RSI as a trading tool by introducing the concept of range rules.
The theory behind range rules is that countertrend price action in trending markets has specific momentum signatures. RSI, for example will find support within roughly the 50-40 region when pullbacks in uptrends occur. Conversely, when bounces develop in downtrends, RSI will meet resistance in the 50-60 area.
Taking the path of least resistance is a benefit of trading in the direction of the trend. Moreover, the use of RSI and application of Andrew Cardwell's range rules help identify when a trader can rejoin the trend.
By the way, if you enjoyed this quick lesson and want more trading lessons from Jeffrey Kennedy -- including his best market picks 3-5 times a week -- check out his popular Trader's Classroom. You'll get 15-20 new video lessons each month and learn to find trading opportunities for yourself (in any market).