Buy And Sell Signals With RSI Indicator and Trend Reversal Candlestick Patterns

Published: 29th January 2010
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The Relative Strength Index (RSI) is a fairly popular indicator that can tell you whether a stock or a currency pair is overbought or oversold. RSI value ranges between 0 and 100. Values below 30 indicate that the market is oversold and above 70 means that the market is overbought.

The good thing is that you can combine RSI reading with candlestick reversal patterns to further confirm that a reversal is imminent and you can take a long position. You can also use the RSI to select your exit level.

Suppose you are trading a stock with the RSI indicator value under 30 meaning that the market is oversold. You spot a three inside up reversal candlestick pattern appears after many bearish days. This is a signal that the market is changing gear and turning bullish from bearish with more buyers are stepping in. This is the best time to go long on this stock.

The beauty of this three inside up candlestick pattern lies in the fact that it takes three days for this candlestick pattern to form. When you spot the first two candles formed with the candle on the first day bearish, the candle on the second day bullish but small get anxious for the candle on the third day to be bullish and higher than the open of the first candle. This gives you plenty of time to plan your swing trade.

Now, when the three inside up candlestick pattern appears, it is an indication that the market has indeed turned bullish and you are about to see a bullish market for many days. This means that the market has reversed and a new uptrend has started. This is the best time to go long on the stock. Place the stop loss close to the position where you went long as the market is not supposed to return to that level for many days. As long as the RSI reading is below 70, you can rest and relax. But don't wait for the RSI reading to go above 70, get alert when the RSI reading goes above 50. This is an indication that the market is above to become overbought and you should start looking for a candlestick reversal pattern to appear to confirm this.

When you find the candlestick reversal pattern like the bearish three outside up candlestick reversal pattern, this is the confirmation that the market is indeed turning bearish now. This is the time to take profit and exit the market. Combining RSI or Stochastic Indicator with Candlestick Reversal Patterns can be powerful tool in your trading arsenal.


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Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE. Master these Candlestick Patterns!

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