how to know strength of trend (part3)

7) RSI

The RSI is another indicator that measures strength. It is similar to the ADX but the RSI is directional. In a healthy uptrend, the RSI makes new highs and higher lows. In a downtrend, the RSI makes new lows and lower highs. In a range environment, the RSI moves sideways between 30 and 70.
The screenshot below shows that the first uptrend was initiated by an RSI divergence (higher lows on the RSI and lower lows on price – a momentum divergence). During the following uptrend, the RSI made higher highs and higher lows. After the uptrend, price moved down for a while but not with a lot of strength and the RSI stayed mostly between 30 and 70 (dotted arrow). The next uptrend-phase also started after an RSI divergence and the RSI started making higher lows again until, just recently, another divergence signaled the end of the uptrend.
 
 

• During an uptrend, the RSI makes higher highs and higher lows
• A flat RSI ranging between 30 and 70 indicates a lack of momentum
• An RSI divergence shows a momentum divergence and it is often a reversal sign

8) BOLLINGER BANDS ®

Bollinger Bands® can be combined with other momentum indicators but they are also a great tool for themselves. The screenshot below shows a healthy uptrend and the Bollinger Bands® showed that as price stayed above the middle Band; price “grinding” higher between the middle and the outer Band is a typical trend signal.
A trend is usually broken once price crosses the middle Band. A price spike outside the outer Band which immediately reverses back into the Bollinger Bands® can often signal a change in trend direction.
 

• In an uptrend, price moves higher between the middle and the outer band
• A break of the middle band often signals a trend reversal or the lack of momentum
• A price spike through the outer bands and an immediate reversal indicates a sentiment shift

KNOWING THE STRENGTH OF A TREND IS THE BACKBONE OF ANY TRADING METHOD

Understanding trend strength and being able to read the balance between bulls and bears is a very important skill every trader has to develop. And although each of the 6 described tools and concepts can be very helpful, you should pick 1-2 to avoid confusion and indicator redundancy.
The trading tools and concepts described are not a standalone system by themselves, but they should build the backbone of any trading methodology.