TradeTale Reversal Alert ๐
This script explains how RSI Oscillator along with Bollinger Bands & Moving Average can be used to catch "Reversal Points".
What is an Oscillator:-
An oscillator is a technical analysis tool that constructs high and low bands between two extreme values and then builds a trend indicator that fluctuates within these bounds. Traders use the trend indicator to discover short-term overbought or oversold conditions. RSI with MA is used along with minor calculations (maths) in this Oscillator for generating Long and Short signals.
RSI:-
RSI is a momentum oscillator which measures the speed and change of price movements. RSI moves up and down (oscillates) between ZERO and 100. Generally RSI above 70 is considered overbought and below 30 is considered oversold. Some traders may use a setting of 20 and 80 for oversold and overbought conditions respectively. Some traders may use a setting of 10 and 90 for oversold and overbought conditions respectively. However this may reduce the number of signals. 10 to 30 is shown as bullish zone and 70 to 90 is shown as bearish zone in this Oscillator.
Calculation:-
There are three basic components in the RSI - Avg Gain, Avg Loss & RS.
Avg Gain = Average of Upward Price Change
Avg Loss = Average of Downward Price Change
RS = (Avg Gain)/(Avg Loss)
RSI = 100 โ (100 / (1 +RS ))
First Calculation:-
RSI calculation is based on default 14 periods.
Average gain and Average loss are simple 14 period averages.
Average Loss equals the sum of the losses divided by 14 for the first calculation.
Average Gain equals the sum of the Gains divided by 14 for the first calculation.
First Average Gain = Sum of Gains over the past 14 periods / 14.
First Average Loss = Sum of Losses over the past 14 periods / 14.
The formula uses a positive value for the average loss.
RS values are smoothed after the first calculation.
Second Calculation:-
Subsequent calculations multiply the prior value by 13, add the most recent value, and divide the total by 14.
Average Gain = / 14.
Average Loss = / 14.
if
Average Loss = 0, RSI = 100 (means there were no losses to measure).
Average Gain = 0, RSI = 0 (means there were no gains to measure).
Moving Average (MA):-
A moving average (MA) is used in technical analysis, used to help smooth out price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend.
Bollinger Bands (BB):โ
It is consists of a Moving Average line and two standard deviation lines that are plotted above and below the moving average line. The moving average periods & standard deviation can be adjust according to the preference. Bollinger Bands help traders to identify the volatility and potential price range of security.
Logic of this indicator:-
RSI is an oscillator that fluctuates between zero and 100 which makes it easy to use for many traders. Its easy to identify extremes because RSI is range-bound.
Bollinger Band Upper and Lower Bands are used to identify Overbought & Oversold points Respectively. Price crossover of these Upper & Lower Bands used to calculate Reversal Points.
BB, RSI and MA calculations along with maths is used to generate signals.
Rocket signal in is Long Signal and also exit Short signal. (Bullish Entry/Exit)
Bear signal is Short Signal and also exit Long signal. (Bearish Entry/Exit)
But remember that RSI works best in range bound market and is less trustworthy in trending markets. (caution)
A new trader need to be cautious because during strong trends in the market/security, RSI may remain in overbought (70 to 90) or oversold (10 to 30) for extended periods.
Also Bollinger Bands here are used to calculate range reversal, So is less trustworthy in trending markets. (caution)
Chart Timeframe:-
This Indicator works on all timeframes.
Traders should set stop loss and take profit levels as per risk reward ratio.
Note:
Don't confuse RSI and relative strength. RSI is changes in the price momentum of a security.
whereas relative strength compares the price performance of two or more securities.
Like other technical indicators, This indicator also is not a holy grail. It can only assist you in building a good strategy. You can only succeed with proper position sizing, risk management and following correct trading Psychology (No overtrade, No greed, No revenge trade etc).
THIS INDICATOR IS FOR EDUCATIONAL PURPOSE AND PAPER TRADING ONLY. YOU MAY PAPER TRADE TO GAIN CONFIDENCE AND BUILD FURTHER ON THESE. PLEASE CONSULT YOUR FINANCIAL ADVISOR BEFORE INVESTING. WE ARE NOT SEBI REGISTERED.
Hope you all like it
happy learning.
What is an Oscillator:-
An oscillator is a technical analysis tool that constructs high and low bands between two extreme values and then builds a trend indicator that fluctuates within these bounds. Traders use the trend indicator to discover short-term overbought or oversold conditions. RSI with MA is used along with minor calculations (maths) in this Oscillator for generating Long and Short signals.
RSI:-
RSI is a momentum oscillator which measures the speed and change of price movements. RSI moves up and down (oscillates) between ZERO and 100. Generally RSI above 70 is considered overbought and below 30 is considered oversold. Some traders may use a setting of 20 and 80 for oversold and overbought conditions respectively. Some traders may use a setting of 10 and 90 for oversold and overbought conditions respectively. However this may reduce the number of signals. 10 to 30 is shown as bullish zone and 70 to 90 is shown as bearish zone in this Oscillator.
Calculation:-
There are three basic components in the RSI - Avg Gain, Avg Loss & RS.
Avg Gain = Average of Upward Price Change
Avg Loss = Average of Downward Price Change
RS = (Avg Gain)/(Avg Loss)
RSI = 100 โ (100 / (1 +RS ))
First Calculation:-
RSI calculation is based on default 14 periods.
Average gain and Average loss are simple 14 period averages.
Average Loss equals the sum of the losses divided by 14 for the first calculation.
Average Gain equals the sum of the Gains divided by 14 for the first calculation.
First Average Gain = Sum of Gains over the past 14 periods / 14.
First Average Loss = Sum of Losses over the past 14 periods / 14.
The formula uses a positive value for the average loss.
RS values are smoothed after the first calculation.
Second Calculation:-
Subsequent calculations multiply the prior value by 13, add the most recent value, and divide the total by 14.
Average Gain = / 14.
Average Loss = / 14.
if
Average Loss = 0, RSI = 100 (means there were no losses to measure).
Average Gain = 0, RSI = 0 (means there were no gains to measure).
Moving Average (MA):-
A moving average (MA) is used in technical analysis, used to help smooth out price data by creating a constantly updated average price. A rising moving average indicates that the security is in an uptrend, while a declining moving average indicates a downtrend.
Bollinger Bands (BB):โ
It is consists of a Moving Average line and two standard deviation lines that are plotted above and below the moving average line. The moving average periods & standard deviation can be adjust according to the preference. Bollinger Bands help traders to identify the volatility and potential price range of security.
Logic of this indicator:-
RSI is an oscillator that fluctuates between zero and 100 which makes it easy to use for many traders. Its easy to identify extremes because RSI is range-bound.
Bollinger Band Upper and Lower Bands are used to identify Overbought & Oversold points Respectively. Price crossover of these Upper & Lower Bands used to calculate Reversal Points.
BB, RSI and MA calculations along with maths is used to generate signals.
Rocket signal in is Long Signal and also exit Short signal. (Bullish Entry/Exit)
Bear signal is Short Signal and also exit Long signal. (Bearish Entry/Exit)
But remember that RSI works best in range bound market and is less trustworthy in trending markets. (caution)
A new trader need to be cautious because during strong trends in the market/security, RSI may remain in overbought (70 to 90) or oversold (10 to 30) for extended periods.
Also Bollinger Bands here are used to calculate range reversal, So is less trustworthy in trending markets. (caution)
Chart Timeframe:-
This Indicator works on all timeframes.
Traders should set stop loss and take profit levels as per risk reward ratio.
Note:
Don't confuse RSI and relative strength. RSI is changes in the price momentum of a security.
whereas relative strength compares the price performance of two or more securities.
Like other technical indicators, This indicator also is not a holy grail. It can only assist you in building a good strategy. You can only succeed with proper position sizing, risk management and following correct trading Psychology (No overtrade, No greed, No revenge trade etc).
THIS INDICATOR IS FOR EDUCATIONAL PURPOSE AND PAPER TRADING ONLY. YOU MAY PAPER TRADE TO GAIN CONFIDENCE AND BUILD FURTHER ON THESE. PLEASE CONSULT YOUR FINANCIAL ADVISOR BEFORE INVESTING. WE ARE NOT SEBI REGISTERED.
Hope you all like it
happy learning.