RSI for Trend Reversal and Chop

RSI for Trend Reversal and Chop Indication

Chop days rarely put me to sleep. Rather, they inevitably lead me to experimentation. And today, it is this simple minded approach to "how do you know you are in chop". I hate those angels-on-a-pin arguments about just what is a trend, just what is chop, do they even exist... blah blah blah. This post presumes you just want a quick glance approach to this great existential question.

I've looked at just about every indicator known to the free world (ie, I haven't bought any of Jurik's stuff :) ) including ADX, and, aside from simple Supt/Resist and price action, I still like RSI for chop/trend indication as it is just so simple. This example is with RSI, but you could do a similar thing with a stochastic, using pretty much the same settings.

When price chops, indicators will "center". RSI will mash around 50. A typical mash range is 45 to 55. Once RSI pushes through the upper or lower range, you can use an MA to confirm the break and place your trade in the direction of the break.

I use a Fisher RSI, which in effect exaggerates RSI and makes it more Stochastic like. Through experimentation, I typically Fisherize with a .1 factor on the standard RSI-14.

OK, that's the indicator. Now for how I use it.

For day trading, I have concluded that I ignore indicator panes. That's me, that's my quirk. However, I do find that what indicators can do to be useful, so I put the most relevant information on the chart itself.

RSI is, of course, useful for divergence, but as I mentioned, my daytrading quirk means I probably won't see or use it. So, when day trading with RSI I am interested only in two things: chop and extremes.

When the Fisherized RSI is between 45 and 55, I put orange highlights (or orange bars) on the chart. When RSI is at extremes, I put a Yellow ribbon on the chart and/or I'll color the bars purple for over-bought and green for over sold.

Here are two examples. You can see chop areas are highlighted and that breaks of the chop in the direction of "the trend" can be well set-up.

By the way, yes, of course "indicators lag". Duh. However, if one is at the point in their trading where identifying chop areas is necessary, lag is not the most important criteria. To "speed" things up, you could use a stoRSI if you want "faster" indications. The core idea is to use the centering quality of the indicators to your advantage.

Ensign Template: RSI_OB-OS_Jammy.dat

Vol Chart example

15m Chart example

RSI for Reversal and Chop

RSI for Trend Reversal and Chop Indication