When I am setting up a trade, I always use Elliott wave and RSI as a wave count confirmation tool. In this post Elliott wave forex eas that work will show you how the RSI can help you confirm the Elliott wave count, and then indicate possible entry points. Also, how Elliott wave and RSI, can help you stay in the market and ride a trend move to its completion. RSI DIVERGENCE AT TOPS AND BOTTOMS.
RSI definition, what does it all mean for my trading? The RSI indicator Has definitely got one up over its competing oscillator in the fact that it has fixed points extremes at 0 and 100. Rather than the relative floating extremes of say the Momentum or Rate of change oscillators. In that sense it does give the trader a base to work from in judging one period of market action to another. The RSI indicator is also smoother than it’s big brothers, Because it uses the Exponential moving average, it tends to be less jumpy and more consistent. If the indicator is below 30, then the price action is considered weak and possibly oversold. If it is reading above 70, then the asset is after a strong uptrend and could be overbought.
Buying when the indicator crosses 30 to the upside means you are counting on the trend reversing and then profiting from it. The same is true for selling when the RSI crosses down below 70 and using this a sign that the market is reversing from a strong uptrend. Life is never that simple though, and more often than not, you will find that the risk involved in this type of simplistic approach is ruinous to you account balance. New traders tend to gravitate to the RSI when attempting to delve into analysis for the first time. The starting point for me is always the Elliott wave count.
Before even thinking about entering a trend trade, I want to see a completed wave structure on the chart. When the wave structure is complete which calls for a turn in the market, I then look at the RSI add weight to my wave count. The RSI is a great tool to show a shift in momentum in a market. The chart below shows the GOLD price off the lows of late 2015.