RSI Strength ZonesBharat Jhunjhunwala

CMT, MFTA, CFTe, MSTA

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• How we proceed:• Little Gyan

• Price & Momentum Relationship

• Strength Zones RSI

• Divergence

• The Three Kisses Signal

• Cut the Noise – How we have to place ourselves in Current Markets.

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Journey of a Trader:

• Our goal as a trader is to move from the path of unconscious incompetence to unconscious competence.

• Four Stages of Learning:• Stage I: We do not know what we don’t know

• Stage II: We know what we don’t know

• Stage III: We know what we know

• Stage IV: Unconscious Competence

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Knowledge & Skills. 5%of the Traders.

Knowledge & Developing Skills. 10% of the Traders.

Developing knowledge but no skills. 15 % of the Traders.

Little or no skills:

70% of Traders.

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How to stop losing money in markets?

But the best way to stop losing and start making consistent profits in the market is to become self-aware and admit that what you are doing is not working and acknowledge that you don’t have all the answers and you need help. In simple terms, this means being open to learning.

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• What is momentum?• It is a tendency of a trend to keep going in the same direction with the same

speed.

• Momentum gives us a “heads up” signal. As it leads the price.

• RSI is the most popular & most “mis”used technical momentum indicator.

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LEVELS ON RSI

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• Traditionally RSI is used as an Overbought & Oversold indicator.• If it moves above 70 it is considered as a SELL signal

• If it moves below 30 it is considered as a BUY signal

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• When it comes to using standard 70/30 settings on RSI as an indication of Buy & Sell it’s worthless to use it.

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• In early 1980 Andrew Cardwell started to work on RSI & he observed that RSI changes it character in Uptrend & Downtrend.

• The Overbought & Oversold levels SHIFTS up & down during different market phases.

• In a Bear market the RSI seldom moves above 60 & similarly in the Bull markets it will hesitate to fall below 40. (Now a days everybody knows this also – so this concept is also MISUSED)

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• The stock markets runs on Human Perception about a Stock or Commodity, since our thoughts are not fixed or anchored to a fixed level then how can prices or its derivatives can be anchored?

• To avoid stiffness, we have created “zones” on RSI • Bear Support Zones

• Bear Resistance Zones

• Bull Support Zones

• Bull Resistance Zone

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• When we are in Bear Markets:• RSI Bear Resistance Power Zone is 55 – 65

• RSI Bear Support Power Zone is 20 - 30

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• When in Bull Markets• RSI Bull Resistance Zone is 75 – 85

• RSI Bull Support Zone is 35 - 45

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• Whenever RSI reaches the Bull & Bear power zones, expect some reactions in price.• During bull markets corrections prices are expected to halt close to Bull

Support Zones. Similarly during Bear Markets correction the pullbacks are expected to halt at Bear Market Resistance Zone.

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• Important Takeaway: The Risk Reward Ratio is very favorable when Long Positions are entered at Bull Market Support Zones & Shorts are created at Bear Market Resistance Zone.

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• Always Remember: We must take trades when the odds are in our favor.• Never go SHORT at Bull/Bear SUPPORT ZONES

• Never go LONG at Bull/Bear RESISTANCE ZONES

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• Divergences: Are Trend Reversal Patterns (They may reverse the on going trend temporarily)

• Mind You I have used the word “Reverse” not “Change”

• Must say this is another misunderstood concept on RSI. We all know what divergence is but the problem is we don’t know when to trade it!

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• Trading for the Larger Moves:

• Steps:• Look for an established trend on a HIGHER timeframe (Say Daily).

• On a LOWER timeframe (Hourly):• Look for divergence

• Make sure the RSI holds on to BULLISH SUPPORT ZONES!

• We are looking for Bullish Divergence that are close to Bullish Support Zones.

• In some cases we will have to refer to 15 min frames as well

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• Applying Trend Filters:• Moving Averages are the best trend determinants. We can apply them on the

daily charts to filter Up Trend or Down Trend to refine our Trades.

• Trading in the direction of the Trend makes sense.

• We use Triple Moving Average for Trend Determination.

• 21,55,200 Day SIMPLE MOVING AVERAGE

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Up Trend Down Trend

Price above - 21 DMA - Rising Slope Price below - 21 DMA - Falling Slope

Uptrend – Act on Buy Signals Downtrend – Act on Sell Signals

Price between - 21 DMA & 55 DMA – Rising Slope Price between - 21 DMA & 55 DMA – Falling Slope

Expect Chops till prices moves above 21 DMA – Act on Buy Trades

Expect Chops till prices moves below 21 DMA – Act on Sell Trades

Price between - 55 DMA & 200 DMA Price between - 55 DMA & 200 DMA

Indication of Deeper Correction. Stay Out of Long Trades

Indication of Deeper Pullbacks. Stay Out of Short Trades

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• As we are interested in trading Momentum we will be looking into stocks/commodities those are above RISING 55 DMA.

• The Trend Determination is Done on Daily Charts & Trades are planned on Strength Zones on RSI.

• We are planning “Mean Reversion Trades” in Up Trends.

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Three Kiss Signal

More than a Mean Reversion

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LONG TRADES

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• Look for:• Prices in Up Trend on Daily (Moving Averages)

• Rising trendline joining the lows, with the second higher low forming in the Bull Support Zone (On Hourly Charts)

• The Third Touch of the RSI Trendline is Buy Signal

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SHORT TRADES

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• Look for:• Prices in Down Trend on Daily (Moving Averages)

• Rising trendline joining the highs, with the second higher low forming in the Bear Resistance Zone (On Hourly Charts)

• The Third Touch of the RSI Trendline is Sell Signal

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A LIVE SETUP

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FIBONACCI NUMBERS

Looking into High Probability Support & Resistance Zones

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• The Fibonacci sequence is a series of numbers, where a number is found by adding up two numbers before it. ... Fibonacci ratios i.e. 61.8%, 38.2%, and 23.6% can help a trader identify the possible extent of retracement. Traders can use these levels to position themselves for a trade.

• For our purpose we will be looking at two levels on the Fibonacci – 61.8% & 70.7%

• As we are looking for deep corrections that pushes RSI beyond extremes on lower time frames.

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BOOKING GAINS & STOPLOSS

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• Stop Loss: The low of the swing on which the RSI kissed the trendline 3rd time should be the stoploss.

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• Booking Gains: We will be using Super Trend (2,10) settings to book our gains. • Exit (without any second thought) when prices close below Super Trend (2,10)

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• Please Note: Sometimes the RSI won’t create a signal of hourly charts. In that case refer 15 min charts.

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• Let’s Look at • Nifty (Budget Day Trade)

• USDINR (Latest Trade)

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STOCKS & YEILD SAGAEp 4

Bharat JhunjhunwalaCMT, MFTA, CFTe, MSTA

Cut The Noise

Listening to Market’s Music

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• Understanding Business Cycles: The primary trend revolves around the business cycle, which extends for approximately 3.6 years from trough to trough. Rising and falling primary trends (bull and bear markets) last for 1 to 2 years.

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The Stock Markets & Bond Yield Saga

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• The thing is, rising bond yields often coincide with economic recovery. Investors are betting on increased spending, growing wages and all that, which bring back inflation.

• Growing inflation expectations = rising bond yields.

• When the economy is recovering, companies' earnings grow parabolically. And quickly growing earnings more than offset the bad effects of rising rates on stocks. Here’s what that looks like:

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• That’s exactly the case right now. This earnings season is beating most expectations. And it looks as if stocks are just warming up.

• Growth that they think is more than enough to counter the effects of gradually rising rates.

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• Stocks that will make the most out of rising bond yields

• That’s not to say that all stocks shine in this environment. Some stocks do very well when rates north higher, others flop. This is the time to be more picky, so here’s a quick cheat sheet for your research.

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• First, look into small-cap stocks vs. large cap stocks. Smaller companies are more reactive to the economy. In other words, they bomb during recession, but do very well when the economy bounces back.

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• Second, consider cyclical stocks vs. defensive stocks (like staples). The cyclical sectors— including banks, metals, energy, manufacturing, infra, realty—get beaten down during recessions. But when the economy picks itself back up, they fly right out of the gate.

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• Third, value over growth:

• That’s because 1) growth stocks are more sensitive to rising rates and 2) just like cyclicals, value stocks are more attuned to the economy. That means economic recovery is more likely to counter the “side effects” of rising rates for these stocks.

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Your Money Your Call

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Thank YouBharat Jhunjhunwala

CMT, MFTA, CFTe, MSTA

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Twitter: @bharatj82

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