Nifty: How to identify reversals using RSI?

Relative Strength Index (RSI) is a very important indicator which is widely followed by many traders. There are multiple ways in which this indicator can be used.

Majority simply rely on reading the usage of Indicator on Google and start applying the way it is given. However, 90% of the traders lose money and so there has to be different way in which these indicators like MACD, RSI, ROC should be used.

Look at the below chart of Nifty along with the highlighted areas on RSI.

Nifty 60 minutes chart:

Overbought and oversold zone is not based on standard values like 70 as overbought and 30 as oversold. Rather by looking at the past history we can derive the values that are overbought or oversold. In above chart we can see that 70 to 76 is the overbought zone whereas 30 – 24 is the oversold zone.

A trader should avoid creating fresh positions when RSI reading is in this zone and at the same time book partial profits on the existing positions. Even recently we can see that RSI reversed back from the 75 level and this coincided with Indian strike on Pakistan today early morning.

An expert trader is aware that such events can result into short term random movement and it is best to book out and wait for clear trend to emerge.

The above clearly shows how a simple indicator like RSI can help one understand when not to enter the fresh long positions as the reading was already in the overbought zone not based on any magical number of 70 but derived based on past history.

So, how to look at this indicator in much more depth? And how to apply ROC, MACD, ATR indicators in ways you never ever tried looking at it? How to be among the 10% of traders that make money consistently trading or investing in market?

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