Can RSI oscillator help Elliott wave trading? How one can use the RSI oscillator as an Elliott trader? Those are the questions I will be answering throughout this article. Let's get started.
Can RSI Oscillator Help Elliott Wave Trading?
No question about it, the RSI can help Elliott wave trading. It is important that one learns to master the RSI oscillator trading like a pro at Dayprotraders.com.
To keep a long story short, the RSI oscillator does a very good job in revealing if the price is more likely to continue to rise or decline. When the magnitude of recent gains is superior to recent losses, the RSI will be above 50. On the other hand, when the magnitude of recent losses is superior to recent gains then the RSI oscillator will stay below 50.
Indeed, that excellent function of the RSI does help Elliott wave trader especially during the third wave. The RSI is always above 50 during the third wave. It continues to rise well above 70 during the third wave.
Contrary to other technical traders that are wasting their time trying to sell because the RSI is overbought, the wave traders stick to their wave count until there is a fifth wave in place.
In a bullish trend, the RSI stays above 50 until the end of a bullish trend. It stays below 50 until the end of the bearish motive wave. However, it will only try to reset itself during the fourth wave by dipping below the fifty in an uptrend or rising above 50 during the bearish 4th wave.
Most professional Elliott wave traders do use the RSI oscillator in conjunction with the Elliott wave count. It is just another tool that helps to navigate the financial markets.
Remember, one wants to know where one is and where one is headed as an Elliott wave trader. So the RSI indicator does play a vital role in that quest.
How Can One Use RSI Oscillator As An Elliott Wave Trader?
Usually, at the peak of the first wave, the RSI exhibits a false divergence. Though, one should not ignore the divergence, it is prudent to avoid trading against the momentum. A resistance can be broken to the upside just before that false bearish divergence. Similarly a support is broken to the downside just before that false bullish divergence (down trend).
Normally, after a valid bearish divergence, a bullish trend line or support is broken to the downside. Why this time, a bearish divergence is in place after the price is showing more strength by breaking out to the upside?
I am not saying that one should disregard the divergence, but one must be aware of the false divergences at the peak of the first wave.
Warning Though, a false divergence may be in place before the start of the second wave, it is always prudent to avoid being on the wrong side of the third Elliott wave.
Truly, an Elliott wave trader is using the RSI oscillator in those instances to find his or her way home so to speak.
In the third wave, one must focus on the breakout trade setups as long as the RSI oscillator is above 70 level (overbought or strong momentum). In a third bearish wave, one will also concentrate on on the bearish breakouts as long as the RSI is below thirty (oversold or strong bearish momentum).
One can use the overbought or oversold RSI to find financial instruments that are in the third Elliott wave.
Note that the RSI is usually overbought in a third bullish wave. However, that does not mean that whenever the RSI is overbought, the asset is in a third wave. It is the third wave that causes the RSI to reach the overbought zones. The overbought RSI does not create the third wave. I am dwelling on that a bit because of the beginner wave traders.
The RSI oscillator becomes really useful at the end of the fifth wave when it often fires a valid divergence trading signal. I know that many traders just sell as soon a bearish RSI divergence is in place. If that is you go to Dayprotraders YouTube channel to learn more about RSI oscillatordivergence trading.
To avoid a long discussion, I will recommend that Elliott wave traders check out the YouTube playlist below.
How To Combine Elliott Wave And RSI Oscillator
The Elliott traders love the RSI oscillator like their mother. It is a useful technical indicator in the arsenal of the Elliott wave analysts.
Yes, it really helps to spot both the false and valid divergences. It stays in the oversold or overbought zone during the third wave. By doing so, the RSI indicator helps wave traders to navigate both bullish and bearish motive waves (trending phase).
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