In Japanese Candlestick Charting Techniques, Steve Nison included a section on using candlesticks with oscillators including stochastics, RSI, and moving average oscillator. According to Steve Nison, oscillators are objective and augment the more subjective candlestick patterns.
In this article, we will focus on trading using RSI and candlestick patterns. RSI measures the momentum of gains and losses.
The relative strength in the formula refers to the ratio of average gain to average loss. These averages are calculated in a way similar to the exponential moving average, before turning the relative strength into an index that fluctuates between 0 and 100.
Other than RSI divergences in our trade setups. Divergences occur when RSI does not support prices. The charts below illustrates RSI divergences, we will also look out for candlestick patterns.
2. Short Entry Rules
- A bearish divergence between RSI and the price.
- Sell with a bearish candlestick reversal pattern (Bearish Engulfing / Shooting Star / Bearish Harami) .