It’s What You Believe. . . and Act Upon

I saw this posted in an FF thread and thought I would comment. The poster referenced the book  RSI: The Completed Guide by John Hayden.  My comments are below each “lie.”

The 10 RSI Lies that Traders Believe:

1. A bearish divergence is an indication that an uptrend is about to end.

Bearish divergence on any oscillator is simply an indication that the current momentum is weakening, not the trend.

2. A bullish divergence is an indication that a downtrend is about to end.

Bullish divergence on any oscillator is simply an indication that the current momentum is weakening, not the trend.

3. The RSI will generally “Top Out”  somewhere around the 70 level. At this point we want to start thinking of getting short or at the very least exiting long trades.

The 70 level is an alert that momentum is beginning to reach an extreme range and the market might be overbought. We know that price can continue to move higher, but the 70 level signals us to look at other factors (S&R, Harmonics) for possible set-ups and potential retraces. These levels are nothing more than a cue to look further.

4. The RSI will generally “Bottom Out”  somewhere around the 30 level. At this point we want to start thinking of getting long or at the very least exiting short trades.

The 30 level is an alert that momentum is beginning to reach an extreme range and the market might be oversold. We know that price can continue to move lower, but the 30 level signals us to look at other factors (S&R, Harmonics) for possible set-ups and potential retraces. These levels are nothing more than a cue to look further.

5.  Whenever RSI is above 50, it is a bullish indications. If not long, find an excuse to get long.

Above the 50 level is commonly thought of as bullish bias, not a definitive indication of bullish momentum as the RSI can be above the 50 and flat which would indicate neutral bias. The fact that traders may act upon this observation can validate the inference that bullish bias exists. There is never any reason to “find an excuse to get long.” Acting on an excuse is trading suicide.

6. Whenever the RSI is below the 50, it is a bearish indication. If not short, find an excuse to get short.

Below the 50 level is commonly thought of as bearish bias, not a definitive indication of bearish momentum as the RSI can be below the 50 and flat which would indicate neutral bias. The fact that traders may act upon this observation can validate the inference that bearish bias exists. There is never any reason to “find an excuse to get short.” Acting on an excuse is trading suicide.

7. A failure swing is a significant event.

This is makes no sense to me at all.  A “failure” swing in price action still inevitably creates a swing high or low. 

8. The RSI is unable to indicate trend direction because it is only a momentum indicator.

Clearly when the RSI exhibits steep angles of ascent or descent, we can infer that current momentum and trend strength/direction will correlate.

9. The RSI is unable to indicate trend reversals because it is only a momentum indicator.

When the RSI resides in the extreme ranges,  we can infer that current momentum and trend strength tend to exhibit extreme limits and might weaken. Nothing is certain. Again, these observations are clues to look further, nothing more.

10. It is not possible to use the RSI to set price objectives.

Is might be possible, but why would you? You certainly could choose to use it, and with back testing, decide if using the RSI provides a positive expectancy along with other rules. There are many other better options, so using RSI would not be at the top of my list.

For most of us, RSI (among other oscillators), is just a tool to supplement other conditions incorporated into our rule set. The above list makes statements I find to be inaccurate. Speaking in absolutes always makes me want to play Devil’s Advocate. Posting this kind of list as if it were sacrosanct is not helpful and does not compel traders to want to read the book. Furthermore, the poster thinks he is helping the thread participants, but gives no context or connection to the system outlined in the thread. Just another blurb added to a clutter of confusing and irrelevant information.

RSI is typically  just one component of other trading rules and tools and this list implies over-reliance and overstated importance of the RSI. I didn’t write an entire book specifically about RSI and don’t claim to be an RSI expert, but I am an expert trader and use the RSI with great success as part of my trading arsenal albeit in many of the ways the author claims I should believe are lies. Acting on those beliefs (lies) has done well for me – so I guess I’ll keep the faith.

Rick 

 

 

 

 

 

 

 

 

 

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