Technical Analysis

Example of Ranging Market

Combining RSI and Moving Averages in Ranging Markets

The Relative Strength Index works better than short-term moving average crossovers during ranging markets.

• Crossovers, using 10-day and 25-day moving averages, often occur shortly after times when the RSI hits either the 30 or 70 range. See the green arrows in figure 6 below.
• The RSI, act as a leading indicator and can indicate an upcoming reversal of a trend, either up or down.

Before going on, here are a couple of cautions about using RSI.

• RSI doesn’t always have to hit the 70 or 30 levels, but if it comes close and reverses, it should still be taken as a sign of oversold/overbought tendency.
• Sometimes tops may come before even getting close to 70 or 30. One has to use instincts, analysis, and other indicators to decipher these changes.

In the case investigated below, the RSI could have predicted the upcoming short term trends sooner than moving average crossovers.

Figure 6 depicts a ranging market or sideways trend. In this situation using Buy and Sell signals from one moving average, or using moving average crossovers, can give late and false signals.

• Trade signals using moving average crossovers are in black circles, and on the most part are losing trades.
• The RSI indicator, using the overextended conditions described before, would give the fastest and most profitable signals (teal rectangles).
• The MACD indicator (presented on the next page) tightens up this lag, but still misses some good entry/exits and encounters whipsaws.
• The MACD indicator can be used for confirmation.

The RSI indicator should be a part of a technical trader's strategy during a ranging market. We continue looking at this example on the next page. 

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