Dan Passarelli, CEO - Market Taker Mentoring

Today I want to talk about a technical technique that I like to use so that you can help strengthen your technical skills and make your trading better: RSI.

It's the relative strength index. And the most common way to use it is to determine, just as it sounds, the relative strength of a trend and what a lot of people use it for. Is the trend getting stronger? Is the trend getting weaker? And then some people look and see, is this trend too strong? Is the stock overbought? Or is this trend too strong to the downside? Is the stock oversold?

But I want to talk about a little bit more of a pro tip here, a little bit more ninja, if you will. Look, we have RSI down here at the bottom in this stock. Happens to be Airbnb. And if you take a look on this day here, we hit a new low in the RSI. And it stayed at that level for, let's see here, one, two, three days.

As a matter of fact, it stayed at this low. And this, at this point, disregard anything to the right of that at this point, this was a low in the stock as well. Okay, fair enough. Then it kind of rebounded and was oversold to rebound here for a day, but then kind of pulled back again. And what happened is we got another low in RSI here today and also another low in the stock.

But what's interesting is that this is a higher low than the previous low, but this is a lower low than the previous low. So this is called a divergence, and it works in different types of stocks. Excuse me. It works on different types of indicators, not just RSI.

There's a few others that we look for divergences in, but when there's a lower low in the stock, but a higher low in the indicator, we always tend to go with the indicator, not with the stock, which at first might seem counterintuitive until you start thinking about why indicators exist in the first place.

They take data and manipulate it to make it easier to understand, to give a clearer picture. So we argue that this is a clearer picture than this. And it turns out that did end up working out. In fact, take a look. We actually even see another higher low with another lower low here.

And by the time we got that sort of third divergence signal, the stock ended taking off, and somebody could have rode that trend up for about two weeks and made a nice little profit on. So that's a divergence in RSI.