MTP Development Notes 11｜The RSI filter is not to predict market movements, but to avoid going against overheating.
Hello, this is Tsumo.
This article isthe 11th of the MTP Development Notes.
Today as well, I will talk about something that won’t collapse before you win.
The theme this time is,RSI Filter.
When people hear RSI, many think like this.
If it’s above 70, it’s overbought.
If it’s below 30, it’s oversold.
If high, sell.
If low, buy.
It might reverse soon.
Indeed, you often see explanations like that.
But if you misunderstand here, it can be dangerous.
RSI is not a magic number to predict market moves.
The reason for using RSI filter in MTP is not to catch the top or bottom.
It is to avoid forcing against markets that are overheating.
Today I’ll talk about that.
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RSI is not a tool to forecast reversals
First, I want to make this clear.
RSI is not a tool to forecast reversals.
RSI goes above 70.
So, sell.
RSI falls below 30.
So, buy.
This way of thinking is easy to understand.
But in real trading, it can be quite dangerous.
Why?
In a strong market,prices may keep rising while being overbought.
In a weak market,prices may keep falling while being oversold.
In other words, RSI overheating is, before being a signal of reversal,a signal of momentumas well.
If you misunderstand this, you’ll end up fighting a strong market head-on.
“Because it’s overbought, SELL” is dangerous
When RSI is high, people want to sell.
It has risen this much.
Surely it’s overdone.
It should drop soon.
I understand the feeling.
But selling during a rapid rise is quite dangerous.
When the market is strong, it can extend more than you expect.
It’s already high.
But it can still go higher.
Surely it’s the top.
But it can go further.
This sort of thing happens normally.
Especially when there is strong news material.
When the news is driving in one direction.
When market sentiment is tilted.
In such scenes, RSI may continue to rise at a high level.
If you SELL here against it, you’ll be squeezed out.
Moreover, with trailing or averaging in the strategy, this becomes heavier later on.
Sell during a surge.
It goes higher.
Take the next tier.
It rises again.
Lot sizes increase.
Floating losses grow.
This flow is dangerous.
The RSI filter in MTP aims to stop this.
Not “buy because it’s overbought”but rather,
“don’t fight against overbought conditions with SELL”.
This is the idea.
“Because it’s oversold, BUY” is also dangerous
The opposite is the same.
RSI is low.
It’s oversold.
It might rebound soon.
If you buy here, you might catch the bottom.
This thinking can also be quite dangerous.
Buying during a rapid drop can sometimes hit well.
You might have bought near the bottom.
It rebounded.
It became profitable.
When you have this kind of success, you want to do it again.
But oversold markets can go lower still.
In particular,
when there is strong negative material
when the whole market is risk-off
when there is a one-way panic exit
when liquidity is thin
in such scenes, oversold is not a sign of a reversal, but
a sign that the downtrend may continue.
Buy during a sharp drop.
It goes lower.
Take the next tier.
It falls again.
Floating losses increase.
This is also dangerous.
The phrase “It should rebound soon” is a costly one in markets.
What should be considered with MTP is not to catch the bottom.
During a steep drop, do not forcibly jump in with BUY.
This is it.
In overheated markets, beware of continuation more than reversal
When you see an overheated market, you think of reversals.
It rose too much.
It fell too much.
It should rebound soon.
But with MTP operations, it’s better to first think in the opposite way.
If overheated, first beware of continuation.
RSI is high.
Therefore, do not immediately decide that it will drop.
RSI is low.
Therefore, do not immediately decide that it will return.
If there is momentum in the market, look at whether that momentum can continue a bit longer.
This is important.
Of course, reversals can happen too.
But reading reversals too early is dangerous.
Especially for EA handling trailing or averaging in, early contrarian moves become heavier later on.
First, small floating losses.
Add more later.
Go against it again.
Increase lot size.
Account available margin decreases.
This flow approaches insolvency.
So, in overheated markets, it first stops.
Prioritize not getting swept up by momentum over trying to predict reversals.
That is what the RSI filter is for.