Welcome everyone! Today, we’re starting a new lesson. The price action topic is now complete, and we’ll be moving into another crucial aspect of technical analysis—understanding indicators in the market.
If you’ve observed the charts of many traders, you’ll notice that they often use multiple indicators. But which indicators are essential for you to know about? First, we will explain all the indicators one by one, so you get a basic understanding of each, how they work in the market, and how you can use them. By studying each indicator separately, you can later create your own combinations based on your preferences.
The idea behind explaining each indicator individually is so you can understand how it works in the market, how it can help you make trade decisions, and how it behaves. Once you know this, you can experiment with combinations of indicators that best suit your trading style. We'll also cover important strategies using these indicators once we’re familiar with them.
So, let’s begin with our first lesson.
What is an Indicator?
Normally, without any indicators, our charts look plain, and we draw lines manually or use price action techniques. This can work, but indicators were developed to simplify your work. They help reduce manual effort and give you signals about the market’s movements.
Indicators were created to assist you by offering insights into the market's behavior—where it’s heading, if it's overbought or oversold, and more. A common misconception is that indicators don't work, but in my opinion, anything you consistently use in the market can work. Whether it’s price action, indicators, or any strategy, if you use them correctly and consistently, they all have the potential to work.
The key is to understand how each tool functions, and that takes time and practice. The more you experiment with different methods, the less confusion you’ll face. Learn, practice, and then decide what works best for you. Once you find what suits you, use it consistently, and you will see significant improvements in your trading.
First Indicator: RSI (Relative Strength Index)
Let’s start with one of the most commonly used indicators: the RSI (Relative Strength Index). It measures the strength of a price movement in the market. The RSI tells us whether the price movement is strong or weak.
I’ll show you on the chart how this indicator works, how it was traditionally used, and how I personally use it. We’ll go step by step.
How to Apply RSI:
Let me remove some of the previous markings and add the RSI indicator. Whether you're using any trading platform, the RSI will be available in the studies section. Let me show you how to add it.
In the "Studies" section, you’ll find RSI. Once you add it, it will appear at the bottom of your chart. Let’s increase its size for better visibility.
RSI Value Range:
The RSI’s value ranges from 0 to 100. It can never go below 0 or above 100. On most platforms, you’ll typically see the range set from 20 to 80. When the RSI moves above 80, it indicates an overbought situation, and when it moves below 20, it signals an oversold condition.
Look at how the RSI moves in tandem with the market. When there’s a market downturn, the RSI goes down. When the market moves up, the RSI moves up as well. So, the RSI reflects market sentiment—uptrend or downtrend—by tracking the strength of the movement.
Traditional Use of RSI:
Traditionally, traders would watch for RSI to move above 80 or below 20. Here’s how it works:
Overbought (RSI > 80): When RSI moves above 80, it signals that the market has seen excessive buying, and a reversal is likely. This is a signal to avoid new buys or consider selling.
Oversold (RSI < 20): When RSI drops below 20, it indicates that the market has experienced excessive selling, and a reversal might happen, suggesting it could be a good time to buy.
Let me show you an example on the Nifty hourly chart. When RSI moves into the overbought zone (above 80), you’ll see the market eventually dips. Similarly, when it enters the oversold zone (below 20), the market tends to bounce back.
RSI for Trend-Following:
In recent times, many traders have started using RSI differently. Rather than focusing on overbought and oversold zones, they now use RSI as a trend-following indicator by setting new ranges, such as 40 and 60.
- RSI > 60: This indicates a strong uptrend, and traders often enter long positions.
- RSI < 40: This suggests a downtrend, and traders often go short.
This method focuses on following the market's trend instead of trying to predict reversals. By using these new threshold values (40 and 60), you can ride the trend. If RSI is above 60, the market is likely to continue moving upwards, and you can take long positions. If it’s below 40, the market might continue its downward trend, and short positions become more favorable.
Key Takeaways:
RSI in Traditional Use (20-80): Helps you catch potential reversals in the market. Overbought means a reversal could happen, and oversold suggests the same.
RSI as a Trend Indicator (40-60): Helps you follow the trend more effectively. Above 60, consider long positions; below 40, consider short positions.
Remember, as with any indicator, it’s crucial to backtest and find what works best for you. Whether you prefer catching reversals or following trends, RSI can be a powerful tool in your trading toolkit.
In future lessons, we’ll explore other indicators, how to combine them, and more advanced strategies. For now, practice using RSI and observe how it works in different market conditions.
Conclusion:
Every trader has their own way of using indicators, and what works for one might not work for another. The key is to understand the underlying principles of each tool, experiment with them, and find what fits your style.
So, try out RSI, test its traditional usage, and experiment with the trend-following approach. As you continue learning, you’ll develop your own approach and refine your skills to become a more disciplined trader.
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