The RSI Histo indicator works by calculating the RSI value and deducts the centreline value (50). The resultant value is plotted as a bar (histogram) rather than a line as in the traditional RSI. In the diagram below, positive values above 0 are drawn in blue and negative values in pink.
This version of the RSI indicator makes it easier to see the direction of price momentum. We are interested in buying above a RSI Histo value of 20 and selling below -20 and looking to close our positions at +40/-40 because in most markets you rarely see RSI values reach either 0 or 100.
By using this modified version of RSI, we are able to tilt the odds of trading success in our favour by harnessing price momentum.
Failure Swings
If you have read about the 3 candle reversal and 1-2-3 / 2b pattern descriptions, you’ll know that price will often retrace to (or near to) the level that the pattern was confirmed. This is described as a pullback where the confirmation level is tested as support or resistance.
We have observed that when this pullback occurs, there is a risk that the pattern will fail unless confirmation levels are held. If support (or resistance) holds then typically price resumes the new trend, breaks the confirmation level again and closes above it. This price action has 4 moves and is termed a failure swing:
Break of the prior trend
Pullback towards support or resistance at previous high or low
Push towards the fail point
And close above or below the fail point on your chosen timeframe.
The RSI Histo is able to confirm this price action e.g. for a sell or short trade per the chart image below:
Pink bars break the zero level at the fail point
Blue bars pullback above the zero level
Pink bars break and close below the -20 level
Lower pink bar to confirm downward price momentum
Although we have highlighted the use of using RSI Histo to help confirm the Failure Swing price pattern, it can be used in a similar way to confirm other price patterns whether a continuation or reversal.
RSI Histo Divergence and Convergence
RSI Histo can also identify divergence with price. Divergence occurs when price is making higher highs (or lower lows) but the oscillator does not confirm with new higher highs (or new lower lows).
Divergence warns of the trend’s internal strength weakening and therefore a trend reversal is possible. In the image below, bars above +20 are goloured green and those below -20 are red with all other bars in grey/white. Divergence between price and the indicator are shown by the white lines and arrows point to trade entry setups.
Closing thoughts on RSI Histo
There are several important factors to consider when using the RSI Histo indicator, such as the settings, the score (+20 and -20), and the bullish/bearish divergences. However, one should always keep in mind that no technical indicator is 100% efficient - especially if it is used alone. Therefore, traders should consider using the RSI Histo indicator along with other indicators in order to avoid false signals.
Useful Stuff
We offer a free RSI Histo indicator but have also coded our own indicator that shows the RSI Histo bars and provides alerts when important levels are reached. These can be downloaded from the “Indicator” page on this website. Our custom indicator offers the following features:
Ability to set custom levels other than +/- 20;
Choose your own colour scheme for the histogram bars;
Set different colours for falling positive bars and rising negative bars;
Choice of sound, pop-up, arrows on chart and email alerts at important levels;
Divergence is shown between price and oscillator.
Download your RSI Histo indicator HERE
Download your divergence indicator HERE
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