Shorting with the RSI and Bearish Candlestick Patterns

The relative strength index (RSI) is an indicator that can reveal an oversold or overbought security. The RSI typically appears in an area below a chart, and visually, it’s represented by a line that moves up and down between 0 and 100. It’s really up to you to choose which levels in that range will be considered overbought and oversold, but in this chapter, I use 30 as my oversold level and 70 as my overbought level. That means that an RSI reading under 30 tells you that a bottom is forthcoming. Be ready to buy when that situation presents itself. Using 70 as an overbought level means that an RSI over 70 should alert you to either put on a short or sell a long position, because the trend is about to head south. You can read all about the nuts and bolts of the RSI in Chapter 11.

When combined with candlestick patterns, the RSI can provide an even stronger indication of when the situation is ripe for executing short trades or selling on long positions. In this section, I discuss the ways in which you can combine your candlestick charts with the RSI to make some clever, profitable trades.

Picking short entry points with the RSI and candlesticks

When using the RSI combined with a candlestick pattern to pick a good time to enter a short position, you want to see an RSI reading over 70 (or your personal overbought level) that coincides with the formation of a bearish candlestick pattern. If you have your eye on a chart and you ...

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