Almost every day there is something else that causes us to suddenly drop or launch higher.
From news out about a second wave of the coronavirus to juicy election info … volatility is pretty much a guarantee.
And without a plan, you’re going to get spun around and even left in a nasty spot losing money.
And as a new trader, it’s hard to sort through the massive amount of information out there.
… it’s almost totally overwhelming.
Which is exactly why I developed my Daily Deposits trading plan – to do the hard work for you and guide you to becoming a more knowledgeable trader.
So let me show you one of my favorite indicators and how it can be used to predict huge market moves.
The core of Daily Deposits is based on determining the strength of the markets using premarket momentum analysis.
Daily Deposits is broken down into 3 main parts:
- US and global premarket analysis
- Identification of supporting trade information
- Executing the trade
These premarket indicators are then combined with other indicators that produce some of the most accurate trading signals!
Each of those three main parts are critical to the success of Daily Deposits!
They are like the legs of a triangle… by removing any one of those key pieces of information, you risk collapsing the entire system!
But it’s more than just identifying macro economics.
And that’s where technical analysis and indicators come into action.
Relative Strength Index (RSI)
The RSI indicator is a momentum oscillator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock.
For this example, we are going to assume the RSI is a 14 period.
RSI = 100 − [100 / [1 + (Average loss / Average gain)]]
The average gain or loss used in the calculation is the average percentage gain or losses during a look-back period.
For example… imagine the market closed higher seven out of the past 14 days with an average gain of 1%. The remaining seven days all closed lower with an average loss of -0.8%.
The calculation for the first part of the RSI would look like the following expanded calculation:
RSI = 100 – [100 / [1 + (1%/14) / (0.8%/14)]] = 55.55
Now that we know the relative strength index formula let’s analyze how to use this powerful indicator.
Pro Tip: The default setting for RSI is a 14 period but I use a 2 period for quicker signals intraday.
Now- let’s take a look at exactly how this indicator works and alerted us to a short signal on the markets today.
The Trade Setup
The RSI Indicator provides several signals to traders, from overbought and oversold, to strength and weakness of the recent trend.
4 key signals from the RSI:
- Value over 75 – overbought
- Values under 30 – oversold
- Values increasing – increased buyers
- Values decreasing – increased sellers
Each of the four key signals that can be extremely important when determining the trend or reversal of a stock.
In this example, let’s take a look at what happens to the SPY’s when the RSI has overbought values.
In this example, you can see the RSI traded over 75 into the overbought zone.
And once a stock is considered overbought by the RSI, there is a good chance that there would be a market reversal to follow.
But that is not always the case…
When it comes to trading the RSI, this oscillator is not strong enough to make a stock reverse its trend.
So that is why it’s best to combine indicators and find correlated signals to give conviction in the decision.For example, combining the RSI with Bollinger Bands and Resistance zones actually works better than the RSI indicator by itself.
Combining The RSI With Other Indicators
As you can see the RSI by itself can be a strong indicator to add to any price action analysis for identifying trades.
But when you combine additional indicators with the RSI, it actually generates stronger signals for the trader to look for.
And this is exactly what happened right after the bell on the SPY to start the week.
- RSI signaled overbought on the SPY
- SPY traded into key resistance levels
- SPY traded above the upper Bollinger Band levels
- Momentum starting to show signs of slowing down
Let’s take a look at the chart of this combined signal.
Here’s what I saw on the SPY’s:
- RSI went above 90, signaling overbought stock
- SPY traded into overnight resistance
- SPY traded above the upper Bollinger Bands
- The Momentum was weakening and slowing down
So… after carefully looking over all four bearish signals, it was then I decided to trade put options on the SPYs..
Remember, there is no single “holy grail” indicator or strategy you can utilize in your trading.
Instead, it’s best to understand how technical analysis can help with your decision making and give you a better entry price with your trades.
And if you were able to quickly identify the RSI pattern you could have made huge profits trading the markets short!
5 Important Facts:
- The RSI is a reversal and momentum indicator
- RSI readings between 10 and 90 indicate a strong and healthy trend
- Readings above 90 are considered bullish, and overbought
- Readings below 10 are considered bearish, or oversold
- The default period of the RSI is 14-period