The Relative Strength Index (RSI) is a fairly popular indicator that can tell you whether a stock or a currency pair is overbought or oversold. RSI value ranges between 0 and 100. Values below 30 indicate that the market is oversold and above 70 means that the market is overbought.

The good thing is that you can combine RSI reading with candlestick reversal patterns to further confirm that a reversal is imminent and you can take a long position. You can also use the RSI to select your exit level.

Let’s take an example to make it more clear. Suppose you want to trade a stock. You are using RSI indicator to determine when the market is oversold. You wait for sometime and ultimately find RSI reading to be less than 30 meaning that the market is now oversold and you can enter your trade. But a better way would be to wait for the bullish candlestick reversal pattern to appear. So you spot one, the famous Three Inside Up Candlestick Reversal Pattern. This candlestick pattern usually appears when the market is about to turn bullish after many bearish days. Now when you spot such a candlestick reversal pattern, it is a confirmation that the market is indeed oversold and is about to turn bullish. This is the right time to enter the market just at the level where the candlestick reversal pattern appeared.

The beauty of this three inside up candlestick pattern lies in the fact that it takes three days for this candlestick pattern to form. When you spot the first two candles formed with the candle on the first day bearish, the candle on the second day bullish but small get anxious for the candle on the third day to be bullish and higher than the open of the first candle. This gives you plenty of time to plan your swing trade.

The appearance of this candlestick reversal pattern indicates that the market is going to see an uptrend for sometime in the future. You can go long close to the level where the candlestick pattern appeared placing a stop loss close to that position. Now, as long as the RSI indicator is below 70, it means that the market is not overbought. But as a caution, you should become alert when RSI indicator reading goes above 50. Suppose you have a long position with the RSI indicator reading close to 30 and you are sitting on what could turn out to be a nice profit.

Suddenly RSI indicator changes course and soon it is in the overbought range 70. Start looking for a candlestick bearish reversal patterns like the three outside up candlestick pattern or the hanging man to appear to confirm that the reversal is about to begin. When this happens make your exit making a nice profit. Combining candlestick patterns with technical indicators such as RSI or Stochastics indicator is a powerful tool.

Mr. Ahmad Hassam has done Masters from Harvard. Get the Ultimate Swing Trading Software FREE. Get these three great Stock Trading Reports written by battle hardened investing professionals FREE.