The Relative Strength Index (RSI) and Stochastic Oscillator are bounded momentum indicators that identify overbought and oversold conditions. RSI (default: 14) ranges from 0-100; readings above 70 suggest overbought, below 30 oversold. Stochastic (default: 14, 3, 3) measures where the close falls within the recent high-low range.
RSI: 14-period default. Overbought > 70, oversold < 30. RSI divergence: price makes new high but RSI doesn't (bearish) or new low but RSI doesn't (bullish). Hidden divergence: trend continuation signal. Stochastic: %K and %D lines, crossovers generate signals. Both are most effective in ranging markets.
Buy when RSI < 30 in an uptrend context (oversold within a trend), Short when RSI > 70 in a downtrend context, RSI bearish divergence at resistance = short setup, Stochastic %K crossing above %D from below 20 = buy signal
For RSI: enter at oversold/overbought, exit at the 50 level (mean reversion) or at opposing extreme. For divergence: enter on divergence confirmation candle, target the prior swing. Invalidation: divergence broken by momentum continuation.
RSI 14 on 4H/Daily for swing trades. Stochastic on 5M-1H for intraday.
RSI and Stochastic can remain overbought/oversold for extended periods during strong trends. Using overbought readings to short in a strong uptrend will blow up your account. Always consider the trend context before fading oscillator extremes.
Support and resistance (S/R) levels are price zones where buying or selling pressure has historically prevented the price from continuing in its current direction. Support is a floor where buying emerges; resistance is a ceiling where selling appears. S/R levels are the foundation of technical analysis and provide the framework for every trade setup.
Bollinger Bands consist of a middle band (20 SMA by default) and upper/lower bands set at 2 standard deviations from the middle. The bands expand during high volatility and contract during low volatility. The squeeze (narrow bands) often precedes a significant move, making Bollinger Bands excellent for volatility-based setups.
Gaps occur when price opens significantly above or below the prior close, leaving an unfilled space on the chart. Gap trading strategies exploit the tendency for gaps to either fill (price returning to close the gap) or continue (price extending in the gap direction). Understanding gap types — common, breakaway, runaway, and exhaustion — helps traders determine whether to fade the gap or trade its continuation.
Pivot points are mathematically derived horizontal levels calculated from the previous period's high, low, and close that serve as potential support and resistance for the current period. The central pivot point acts as the primary directional bias level, while support and resistance levels above and below provide profit targets and stop placement zones. Pivot points are widely used by institutional and floor traders, creating self-fulfilling price reactions.