The Relative Strength Index (RSI) is one of the most popular momentum oscillators used by
technical traders worldwide. Developed by J. Welles Wilder, Jr during the 1970s, the indicator
helps to quantify the changes in price and their momentum. The Relative Strength Index
displays the magnitude and speed of directional price movements.
It is a valuable tool used to determine overbought and oversold conditions. Check out here for
more.
Now that you know what the Relative Strength Index is, let me introduce another awesome
concept known as the RSI Failure Swing. Understanding the basic concepts of trend following
is essential to RSI failure swing. This is a trading strategy that can give a great return on
investment.
RSI Failure Swings
Trend signals that indicate a reversal is called failure swings. A Relative Strength Index
Failure Swing is an advanced technique for trading RSI Divergences.
In the case of a classic RSI divergence, the price and the indicator diverge from one
another indicating a loss of momentum in the existing trend.
But in the case of an RSI failure swing, the same phenomenon takes place with price and the
indicator in addition to a confirmation signal of trend change on the breakout of the fail point
on the indicator. These swings can take place during uptrends and downtrends, where the former indicates selling activity while the latter represents buying activity.
1. Failure Swing Top:
A failure swing top occurs when the price makes a higher high in comparison to the previous
high but RSI fails to make a higher high with respect to the previous high and falls below
the recent swing low or fail point of the indicator, thereby triggering a sell signal.
During the first high RSI should stay above the 70 overbought levels while during the second
high, the indicator should form a swing high below the 70 levels.
2. Failure Swing Bottom:
A failure swing bottom takes place when the price makes a lower low in comparison to the
previous low but the RSI indicator fails to make a lower low with respect to the prior low and
it rises above the recent swing high or fail point of the indicator, thereby triggering a buy signal.
More importantly, during the first low RSI should remain below the 30 oversold levels while
during the second low, the indicator should form a swing low above the 30 oversold levels.
How to use the RSI failure swing?
RSI failure swing is a reversal strategy meaning that it is used for entering the positions by anticipating a trend reversal. This means that the position is taken against the existing trend in the market.
When the swing low is made by the indicator, before the swing failure in an uptrend it is a potential entry point signaled by the indicator. In the uptrend, the trader can consider taking a short position.
Similarly, the peak which is formed prior to the swing failure in a downtrend signals a likely entry point. In the downtrend, the trader can look to take a long position.
Failure swings can be very useful for investors who know how to use them. As such, they can be used to trade RSI divergences by identifying recent trends in order to spot the signs of trend reversals. But it is always better to consider multiple confirmations before entering a trade.
Tell us which is your favorite indicator writing in the comment box below.
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