[0:00]Everyone on the internet seems to be teaching the RSI wrong. They tell you to sell when it's overbought and they tell you to buy when it's oversold. And that's exactly how you lose every single trade and get massively wrecked. Let me show you my secret sauce, a simple way to trade RSI divergences that actually works. Locu Montana, this video is for you, and for those of you that don't know, every single week, I make a personalized video response to one of your questions from the comments of the previous video. Locu asked, can you make a video on RSI divergence, reversal, and short short pullback positions? Absolutely, bro. Let's get into it. The RSI is not about spotting tops and bottoms, it's a momentum indicator. It tells you how strong the current trend is. Here you can see the RSI line, and if you look closely, you can see that the typical range is between 70 on the high level and 30 on the low level. The RSI, also known as the Relative Strength Index, firstly, measures momentum and not direction. On the higher side, 70 means that price is overbought. On the lower end, 30 means the price is oversold. But this does not mean that it is confined to these two ranges. It can go outside of them. The RSI is also for trend strength, not entry timing, unless you know the secret sauce. When the RSI breaks above 70, the asset is very strong, but that doesn't mean it's going to reverse yet. The same goes when it falls below 30, just because it's oversold, doesn't mean it's time to buy. Divergences happen when price makes a new high, but the RSI makes a lower high. Or the opposite on the bottom. Price makes a new low, but the RSI makes a higher low. Here is an example of a bearish divergence, where price goes up and RSI goes down. And here is an example of a bullish divergence, where price goes down and RSI goes up. Key things to keep in mind here when spotting divergences is that the price and the RSI are out of sync. They are divergent to each other. This is a sign of trend weakness. It doesn't mean reversal yet, just caution. This is a great warning, but it is not your entry. And that's where my secret sauce comes in. Here's what I do. I wait for the RSI to leave the 70-30 zone. Then I wait for it to come back inside that zone. That's the moment where the momentum flips and that's where I look for entries. Now, let's see a real life example of how this looks on the charts and it is way more simple than you think. This is Gold US Dollar on the 15-minute time frame. This right here is the price. This right here is the RSI. To find the RSI, all you need to do is type in Relative Strength Index, click it and add it to your chart. These are default settings, nothing has been changed. Now, just to show you a quick example. The price right here has been going up. The RSI went up and then started to go down before the price started to go down. This is a divergence. I've been doing that for years, so my eyeballs can spot it immediately. But I have a way simpler solution for you guys and this is my secret sauce. Forget about the price chart and just double click the RSI to make it full screen. All you're looking for is for the RSI to leave the range and then come back into the range. So we left the range right here. And we started to trade within the range right here. So I'm going to circle this. We stayed within the range right here. We left the range right here and then came back in, so I'm going to circle this. We left the range, came back in the range. We left the range, came back in the range. I'm looking at these little peaks after it left the range. Outside of the 70 range, inside of the 70 range. Outside of the 30 range, inside of the 30 range. 70 on the top, 30 on the bottom. And you can just keep circling all of these first points where it was trading within the range after it left the range. Outside, inside. It's super simple. Now, this next part is probably going to blow your brain hole. Take your vertical line tool and place a vertical line on every single one of these areas that you circled. We're not even looking for divergences at this point. We are simply looking at the RSI trading within the range after it's left the range. And the reason behind this is because the price was overbought and then stopped being overbought and went into the normal range. And usually when it goes back into the normal range, it's likely to go to the other side. Because this is an oscillating momentum indicator, it oscillates from one end to the other. So not even looking for divergences, these are the points that I've marked up as it's left the range and come back in the range and made a little peak. Now, double-click the RSI, you'll get your price back up and as you can see here, you take a long position. Here, you take a short position. Here, you take a long position. Here, you take a short position. As you can see here, you take a short position, long position, short position. I'm not even adjusting these tools. I'm just putting the position tool. So just from these that I marked up, we have a win, a win, a win, a loss, but it went in our direction.
[5:39]A win, a loss, a win, a win, a win. You don't even have to look for divergences, even though they were here 90% of the time. Price was going down, RSI was going up. Price was going up, RSI was going down. Price was going down, RSI was going up. These are simply divergences to show you that the momentum was being lost. And all you need to do is wait, be patient. Please wait for the price to leave the 70-30 range, wait for it to start coming back in, then look for those little peaks and tops. And then get in there. Look left for your market structure, put your stop loss below the previous swing and you will make money like 80% of the time. Backtest it 100 times if you want. This is not a 100% win rate strategy, but it is crazy effective. It's been my go-to since day one of day trading. Now, this is just a bonus tip, but if you want to help with these entries, all you got to do is add the Easy Exit indicator. And if you've already marked up your chart and you've gotten into your trade and you see one of these little dots by your entry, you know you're pretty much safe to let that ride out. They don't pop up all the time, but it's a good indication to tell you when the markets are done with that swing up. These are actually exit points. So if you were in a long position here, this would be your exit point. Yellow is a weak exit, orange is a medium exit, and red is a GTFO exit. If this video helped simplify the RSI for you, let me know in the comment section down below and I will see you in the next video.
