The Relative Strength Index (RSI) and Stochastic Oscillator are bounded momentum indicators that identify overbought and oversold conditions. RSI (default: 14) ranges from 0-100; readings above 70 suggest overbought, below 30 oversold. Stochastic (default: 14, 3, 3) measures where the close falls within the recent high-low range.
RSI: 14-period default. Overbought > 70, oversold < 30. RSI divergence: price makes new high but RSI doesn't (bearish) or new low but RSI doesn't (bullish). Hidden divergence: trend continuation signal. Stochastic: %K and %D lines, crossovers generate signals. Both are most effective in ranging markets.
Buy when RSI < 30 in an uptrend context (oversold within a trend), Short when RSI > 70 in a downtrend context, RSI bearish divergence at resistance = short setup, Stochastic %K crossing above %D from below 20 = buy signal
For RSI: enter at oversold/overbought, exit at the 50 level (mean reversion) or at opposing extreme. For divergence: enter on divergence confirmation candle, target the prior swing. Invalidation: divergence broken by momentum continuation.
RSI 14 on 4H/Daily for swing trades. Stochastic on 5M-1H for intraday.
RSI and Stochastic can remain overbought/oversold for extended periods during strong trends. Using overbought readings to short in a strong uptrend will blow up your account. Always consider the trend context before fading oscillator extremes.
Donchian Channels plot the highest high and lowest low over a specified lookback period, creating a dynamic channel that defines the current price range. Originally popularised by the legendary Turtle Traders, Donchian Channel breakouts capture new trends at their inception by entering when price exceeds the prior range extreme. The channel width also serves as a volatility measure and position-sizing input.
Divergence occurs when price action and an indicator (RSI, MACD, CCI, OBV) move in opposite directions, signaling weakening momentum and potential reversals. Regular divergence signals reversal. Hidden divergence signals continuation. Divergence is a leading signal — it warns of momentum shifts before they appear in price.
Chart patterns are geometric price formations that signal continuation or reversal. Major patterns include: Head & Shoulders (reversal), Double Top/Bottom (reversal), Bull/Bear Flags (continuation), Rising/Falling Wedges (reversal), Ascending/Descending Triangles (continuation/reversal). All are measured-move patterns with projected price targets.
Bollinger Bands consist of a middle band (20 SMA by default) and upper/lower bands set at 2 standard deviations from the middle. The bands expand during high volatility and contract during low volatility. The squeeze (narrow bands) often precedes a significant move, making Bollinger Bands excellent for volatility-based setups.