How to use the Relative Strength Indicator for profitable trading ...
Today, we will discuss the standard Relative Strength Indicator and how to vastly improve it by turning it into a CRSI indicator. When deciding to use a Relative Strength Indicator, there is actually very little difference between a RSI and CRSI other than convenience along with the speed and ease of readability. The C-RSI is not complex and it is something we invented to just make deciphering standard RSI Indicators a whole lot easier, faster to read, and while showing excellent accuracy.
First, the C-RSI Indicator Explanation: Since the standard Relative Strength Indicator moves from 0 to 100, 50 is the half-way point and it is actually a neutral number. For that reason, a standard RSI Indicator is often hard to discern relative to whether or not it is clearly positive or negative when looking at it because its scale goes from 0 to 100.
Since 50 is Neutral on a standard RSI chart, we want our investors to use a CRSI chart because everything above its horizontal line can be viewed as a positive reading, and everything below its horizontal line can be viewed as a negative reading. (The formula for the CRSI is quite simple in that we simply take the standard RSI and subtract 50 from each tick.)
Here is the benefit of using a CRSI: Since 0 is the dividing line on a CRSI Indicator, everything above it is positive, and everything below it is negative ... it is that simple.
With that explanation, let's move on to actually seeing a chart with the CRSI on it in order to see how easy it is to use and how effective it can be. The chart below shows the NYSE (NYA Index) going back to January 2015 on top, and a 30 day CRSI on the bottom with vertical dotted lines in order to make reading the chart easier. (Note that we use a 30 day CRSI setting because it tracks with very well with any index.). Take a moment to observe the chart below and compare the price shifts relative to when the CRSI shifted.
Also, when looking at the chart below, you will be able to notice the thick green lines I drew from mid-April to June of 2016. What I would like you to observe here is that the line rises on the NYA Index's price while it falls on the 30 Day CRSI. That is called a "negative divergence" which is really a weakness showing up on a new price rise (the price is going up on weakness).
In such a case the price and the CRSI are out of balance with each other, and balance is always re-established "after the level of net Inflowing Liquidity drops and makes a lower-low". So, divergences never kick in until after the amount of money in the market changes to trending in the same direction as the divergence. (Fortunately, we do provide a daily chart of the market's daily net Inflowing Liquidity levels.)
So, that is the explanation for the CRSI and how it tracks directly with any sectary or index. Enjoy your trading and I hope today's explanation of the CRSI helps you become a better trader.