Hi Charlie,
As for RSI (or Chande) oscillators, I don’t typically care one bit about the numbers. If you look at META, but more so SPY, you can see that the general movement was downward. Stocks move downward when there is more selling than buying. Okay, actually, yes, selling and buying are always exactly equal, but when you move downward there are more shares where the sellers are taking the initiative and accepting the bids made by the buyers. Buyers always want to pay as little as possible so they bid a number that is below the ask that sellers post. But if you really want or need to sell then you don’t post a higher ask that you wish for, you simply accept the lower bid. When you do this, you are the one taking the initiative rather than waiting and you are contributing to lowering the price.
Now, any time the price goes down, you have people who are selling, but at some point the sell-off loses steam and when this happens there is a higher likelihood of a reversal upward. So, if you are looking to catch a bounce, how can you tell when the selling is losing steam? One way is to watch an oscillator like RSI. Look at my chart for SPY. On the far left, the price is going down all morning and into the afternoon, with a few little bounces, but nothing worth trading. At 2pm (14:00) there is a bigger bounce. This was predicted by a divergence in both oscillators. The top one is Chande, and the bottom is RSI. Look at the price chart. It shows a low just after 1pm, then a second lower low at 2pm. Meanwhile, both oscillators showed a low, then a higher low, in other words they started trending up while the price was trending down. This is a divergence (the indicator diverges from the prices) and indicates to us that the selloff is losing steam. 2pm would have been a good time to play the bounce.
Now this is a 5 minute chart. My rule is that on a 5 min chart, any resulting move is only good for about an hour. 1 hour on a 5 min chart is 12 candles. Now, the move could go for a lot longer. It could even be the very start of a multi-day uptrend. But after an hour you need to be aware of a possible reversal. Now charts with longer time frames can go longer. So if you are using 1-hour charts, the the move could last for multiple hours, or on a daily chart, the move is probably going to be for days. When I’m day trading, I generally watch the 5-min chart all day and sometime refer to the longer charts just to get a feel for the grander scheme. I almost never look at the 1-min chart because anything shown on that chart could be so short that it’s not worth it.
Now, advance to today. At the end of the day on both SPY and META we had essentially equal lows with both oscillators trending sharply upward. I play this like a double bottom and bought my META calls. I could have bought the same call on SPY, but I chose META because traders are obviously considering META to be the stronger play so if SPY goes up, META will likely go up more.
Last thing I’ll say: I find oscillators and other indicators to be helpful in trying to assess the likely moves, but they are not perfect. They do not always work. If they always worked, then I would be a billionaire. They only suggest to you that all things being equal (which they rarely are), a reversal is more likely. The best that we can ever do is to find plays that are more likely to work in our favor. The most important part of trading is not your knowledge or your indicators. The most important part is your discipline to limit losses. Traders with high discipline who randomly place trades with zero knowledge generally do much better than traders with low discipline who have expert knowledge of stock markets as well as complete familiarity with all the tools and indicators.
