Regular readers of my newsletters are familiar with the concept of Multi timeframe analysis. The logic of multi timeframe analysis is to decode trend on multiple timeframes, usually three timeframes. We do this as traders to understand the overall direction of the trend and to be able to participate in the lower timeframe’s price pattern so that the stoploss is small. This is an effective technique for participating in a trending market.

But what if we used multi timeframe analysis not for trend but for momentum? Let us explore this idea in today’s newsletter where we understand RSI, Momentum, RSI range shifts, and use these concepts to build a simple bullish scanner to filter stock.

Momentum and RSI

Momentum refers to the rate of change of price. Higher the momentum, faster the change in price. This momentum is captured by RSI indicator. Here is a short description about RSI:

RSI stands for Relative Strength Index. This indicator oscillates between 0 and 100. This indicator uses the past closing price on a trailing basis to calculate Positive price change over the set period and the Negative price change over the set period. When the Positive price change is more than the Negative price change, the indicator rises. When the Negative price change is more than Positive price change, the indicator falls. Rising RSI shows increase in Momentum because this would mean more Positive price changes in the past set number of days. Similarly, falling RSI line shows decrease in momentum.

RSI range and range shift.

I mentioned earlier that RSI oscillates between 0 and 100. This means we can divide the indicator into various ranges which will inform us about the nature of momentum. The range can be as follows with respect to the trend on the chart:

In my experience while using this indicator, a stock in bullish trend will refrain from falling below 40 RSI. Similarly, a stock in a bearish trend will refrain from rising above 60 RSI

RSI and Multi timeframe

Just like multi timeframe analysis for trend, let us consider 3 timeframes for multi timeframe analysis for momentum: Monthly, Weekly, and Daily.

If the Monthly chart’s RSI is above 60, and the weekly chart’s RSI is near 40, it could mean that the price can take support from these levels because the higher trend is in a bullish momentum and is bullish.

Similarly, if the Monthly chart’s RSI is above 60 or 80, weekly chart’s RSI is also 60, and the Daily chart’s RSI is near 40, this can be a support for the stock because both the higher timeframes are in a bullish momentum and in bullish trend.

These RSI range shifts can be used to enhance the effectiveness of multi timeframe analysis. When RSI is added to the analysis, momentum can be understood easily. But when we see it in the context of multi timeframe, we truly start to understand how a stock is actually moving.

Building a multi timeframe scanner

Let us try to build a scanner based on the concept RSI, Trend and Multiple timeframes. The scanner was built on RZone website (By Definedge Securities).

Our aim is to participate on lower timeframe based on the momentum and trend of higher timeframe. For long positions, we want the higher timeframe to be bullish and in bullish momentum and we want lower timeframe to be near 40 RSI or between 40 and 60 RSI. The scanner conditions will be as follows:

1. Monthly timeframe: Price above 21 period Exponential Moving Average (EMA)

2. Weekly timeframe: RSI above 60 and Price above 21 period EMA.

3. Daily timeframe: RSI between 40 and 60 RSI.

Below are the Scanner conditions and the scanner results.

Once the results are given by the scanner, they can be saved as a group on RZone. The trader can then analyze the individual stocks on an EOD basis and then participate the following day. I have usually observed that when the RSI is between 40 and 60 range, the price tends to be consolidating. The result of this scanner will be stocks which are currently consolidating on daily timeframe. Breakout from this consolidation can be used to participate in the stock.

This is one of the simplest yet effective ways to create a trade plan by using simple indicators and logic. This is just one of the basic concepts that I have shared with you. Concepts like these and more advanced than these have been discussed by me in my TNT One program. This program is a library of insightful and effective trading concepts and techniques that I have not only taught but have also been using for the past 10 years. Do check it out and become part of an exclusive group.