Welcome back to the best trading indicators for 2021 part four, and in this video we're going to be discussing the relative strength index. So after this video, you should understand exactly how to best use a relative strength index to give you extra edge in the market. There are a ton of videos out there on the relative strength index. I've made plenty of them so in this video i'm going to give you the fast track way to use the relative strength index correctly and the way that it is mostly taught for most youtube videos, which is actually somewhat incorrect to use it.

That way. So, let's jump into the video, the first thing that you will be taught if you look at most articles, blogs and videos on youtube are getting regarding the relative strength index. It will say this when the relative strength index is below this line. The market is oversold and when it is above this line, the market is overbought and that you would essentially take action in the opposite direction, meaning when the market is up here, you wouldn't buy the stock because it's too overbought and you should probably sell the stock And when it's down below this line, you probably shouldn't sell the stock, you should probably look more or less to buy the stock.

Now, if you look at the relative strength index and you actually track stocks on this base, that they're overbought and oversold, you will come to the conclusion that it does make quite a bit of sense. I mean, if you look at the market here over bought you'll, see that it does in fact pull back or when you look at the market here over fought or overbought, it does pull back. You look at the market here overbought over bought. It does pull back oversold.

It ends up bouncing a little bit overbought, not much of a pullback. There overbought pulls back. So there is some truth to the fact. It does kind of work that overbought oversold scenario.

But let me point it out like this, so the market's overbought you don't buy or you sell your position because it's overbought, then the market goes higher, so the relative strength index doesn't really do a good job at helping you predict trend, so you can see a Lot of overbought and oversold scenarios and then if you follow that on a buy sell basis, you would essentially take yourself in and out of profitable trades all the time. So this is just one stock example. Now, let's go take a look at let's say like tesla. Today, so if we looked at tesla all right, it would say that the market was oversold here and that you should not uh sell it.

You should buy it. So if you go on that basis, you would have bought here and the market would have sold out or you would have never sold short because it said, don't sell it and then it keeps going lower and here's another good example. We go from. Oh, if we go to oversold and the market just stays oversold.

So again, that's really the problem that you'll run into. If you listen to most of the videos and blogs in regards to relative strength index, doing it on a buy sell basis from an oversold to overbought perspective, when you look at this and to be more specific, this is the 30 line, and this is the 70 Line this is sort of the predetermined settings for the relative strength index. You could actually adjust those and make them a little bit stronger by going up to like 80, 75 or 25 and 20, meaning you really only consider those to be oversold or overbought when they exceed those levels. So you could put some more rules, uh or the you could change the parameters of the relative strength index so that um, maybe it doesn't pick up as many false signals - is kind of what i'm getting at.

So that's the way it's mostly going to be taught, but now i'm going to teach you the way that it's actually effective. So you want to use the relative strength index for catching divergences. That's normally what i use it for and if you simply just use it to track divergences, you're going to start to see when trends are actually going to change. The relative strength index will help you understand that trend is going to change before it actually happens.

So the way you go about finding, that is, you look for a divergence i'm just going to pop through stocks because it happens, it happens. All day happens all the time. So here's one all right, so you want to use the relative strength index like this market's going down market hits kind of this bottom and bounces you'll, see that when we go straight down the relative index was down at whatever 20 doesn't really matter, but it was Way, oversold right so then you will see that the market bounces and then it actually goes through the previous low of the market on amd and pretz in a new low. You would go.

Oh my gosh. This is bearish. It's going to keep going down! Well, take a second go down and look at the relative strength index. You will notice that the relative strength index is now uptrending, while the market is trying to go into a new low.

That is what we call a divergence where you see. The price action is decreasing to new lows, while the momentum on the rsi is up trending, that is what we call a bullish divergence. So again, the way to explain it. A bullish divergence only happens after a sell-off or after sort of a bottoming move, because, again, a bullish divergence takes form after a bearish move, we go down, we usually bounce, do some sort of move, and then we go into a new low.

Creating what looks like a new low downtrend, but simultaneously there's an uptrend on rsi and there's always going to look like that, and that is typically a telltale sign that there's going to be a reversal in the stock. So you would essentially start to look for entries around this bottom area when you get a divergence to hopefully catch the true bounce on the day. So we will go ahead and we'll pop through a couple more stocks on the day to see if this occurred anywhere else, we will take a peek at amc today, all right. The reason i said amc is because i knew it already happened.

So amc we have a move up on the day the rsi gets overbought, it tops, market pulls back. Market goes through a new high up. Trending move, trending rsi market pulls back so again. That is the most effective way that you're going to want to use the rsi tracking for bearish or bullish divergences, and in this instance, what i just showed you here with the rsi on on amd.

This is what we call a bearish divergence. Bearish divergence happens, happens after an advance in the stock to the upside direction. Market goes to the up, puts in a top, pulls back, tries a new high or a new new move puts in an uptrend, and it also can be a double top, but more often or not, they're probably going to be a slightly uptrend here. So you will get move, move descending momentum, bearish divergence, all right! This can happen on one minute time frames.

Five minute time frames any time frame. Yearly time frames just so you guys are aware we're going to go. Look at the s p, 500, and i'm going to show you this, i think, on a 20-year chart, maybe all right just before the coronavirus pandemic. Okay, relative strength index - this is back when, like president trump just got in pretty much uh, so you can see.

Market was all the way up here: rsi really overbought market trends into a new high downtrending momentum boom. So realistically, before the coronavirus pandemic, as the s p, 500 is moving into new highs. It was already doing it on less momentum, so whether you want to argue that somebody knew something before somebody knew something i'm not going to have that debate. Nonetheless, the rsi was there to prove to you that we are having descending momentum as the markets try to put in new highs on the s p 500.

What ends up resulting next big down, trending move. You will also see now that on the 20-year chart the market is trending very high into all-time highs and there is no bearish divergence as the market goes up, the rsi has been going up, so that means everything in the market is equal right now there is Nothing that doesn't make sense in the current market structure and everything is kind of ho-hum diddly dumb. That is why, if you watch our morning market analysis every single day, which we do do every single day from 8am to 11am, we do live market analysis. For you guys, um, we usually just mention that the markets are kind of just on the up.

There's really no reason to be bearish for the time being and we're probably going to keep ho hum and until something crazy happens all right now, if we look at say a yearly chart, you will probably start to see a possible divergence not really now. If we look at a four hour, maybe kind of but not really, you can see there's a slight one here, but i wouldn't even consider that a big one. So nonetheless, i will say before we hop off for the day. I will take one more look at some random stock which we'll look at atvi on the day.

So let's go look at the one minute chart. I normally use uh the bearish divergence, more bearish divergence or bullish divergence, most often like on a one minute chart throughout the day. This is a terrible stock for the day does not really help us uh. This also had one here all right, so like facebook.

Today, facebook drops down goes to here. Markets are oversold, drops into a new low down, trending move on price action, up, trending move on rsi, and it ends up bouncing. So again, it's such a common thing to see on a one minute chart normally happens all the time throughout the day. So this is something that i highly suggest that you use throughout the day when it comes to rsi and trying to predict or understand which way.

The markets are going to be moving next after sell offs and after advances in the stock. Look at the rsi look for up-trending momentum or down-trending momentum on the rsi when the stock is doing the opposite thing. So with that being said, ladies and gentlemen, that is the correct way to use the relative strength index going forward. Hope you guys liked the video make sure the thumbs up button subscribe to the channel, hit the notification bell and don't forget to tune in to our morning live streams every single day, monday, through friday, 8 a.m to 11 a.m.

That being said, we will see you on the next video take care.