Rsi trading strategies
In this article, we will cover one of the most popular oscillators — the relative strength index RSI. You have probably read a number of general articles on the RSI; however, in this post I will present four trading strategies you can use when day trading. The Relative Strength Index RSI is one of the most popular indicators in the market. If you look over any market technician's shoulder there are a few indicators that show up trading frequently: MACDsimple moving averagevolume and last but not least the RSI. The RSI is a basic measure of how well a stock is performing against itself by comparing the strength of the up days versus the down days. This number is computed and has a range between 0 and A reading above 70 is considered bullish, while a reading below 30 is an indication of bearishness. The RSI was developed by J. Welles Wilder and detailed in rsi book New Concepts in Technical Trading Systems in June of For all you hardcore technicians, below is the relative strength index formula: The default setting for the RSI is 14 days, so you would calculate the relative strength index formula as follows:. Now that we know the relative strength index formula, let's analyze how to actually use this powerful indicator. Most traders use the relative strength index simply by buying a stock when the indicator hits 30 and selling when the indicator hits If you remember strategies from this article, remember that if you buy and sell based on this strategy "YOU WILL LOSE MONEY". The market does not reward anyone for trading the obvious. Now that doesn't mean that simple methods don't work, but simple methods that everyone else is following have really low odds. The first price bottom is made on heavy volume, which occurs after the stock has been in a strong uptrend for some period of time. This is the reason as mentioned below, that the RSI has been above 30 for a considerable amount of time. After the first price sell off, which also results in a breach of 30 on the RSI, the stock will have a snap back rally. This rally is short lived and is then followed by another snap back reaction which breaks the low of the first rsi. This second low is where stops are run from the first reaction low. Shortly after breaking the low by a few ticksthe stock begins to rally sharply. This second low not only forms a double bottom on the price chartbut the relative strength index as well. The reason this second rally has legs is for 1 the weak longs were stopped out of their position on the second reaction, and 2 the new shorts are being squeezed out of their position. The combination of these two forces produces sharp rallies in a very short time frame. Many users of the RSI incorrectly assume that you should buy stocks with the highest relative strength. This key to trading the relative strength index formula is to find stocks strategies are just breaking out of a sideways range with relative strength compared to the indices. The time to sell a stock is when the stock has advanced significantly out of that base with an overbought RSI reading. With all trades you must use proper risk management, so stops are crucial. You will want to put your stop about. In theory, if the squeeze has begun, the stock has no business breaching the trading bottom's low. Remember, the reaction off strategies a RSI double bottom is sharp and fast. Although the RSI is an effective tool, it is always better to combine the RSI with other technical indicators to validate trading decisions. The strategies we will cover in the next section of this article will show rsi how to reduce the number of false signals so prevalent in the market. In this trading strategy, we will combine the RSI rsi with the very popular MACD. We will enter the market whenever we receive an overbought or oversold signal from the RSI supported by the MACD. We will close our position if either indicator provides rsi exit signal. This is the minute chart of IBM from Jun In this relative strength index example, the green circles show the moments where we receive entry signals from both indicators and the red circles denote our exit points. A bit more than an hour after the morning open, we notice the relative strength index leaving an oversold condition, which is a clear buy signal. The next period, we see the MACD perform a bullish crossover — our second signal. Since we have two matching signals from the indicators, we go long with IBM. We appear to be in the beginning of a steady bullish trend. Five hours later, we see the RSI entering oversold territory just for a moment. Since our strategy only needs one sell signal, we close the trade based on the RSI oversold reading. In this trading strategy, we will match the RSI with the moving average cross indicator. For the moving averages, we will use the strategies and period MAs. We will buy or sell the stock when we match an RSI overbought or oversold signal with a supportive crossover of the moving averages. We will hold the position until we get the opposite signal from one of the two indicators or a divergence on the chart. In addition, I want to clarify something about the MA cross exit signals. A regular crossover from the moving average is not enough in order to exit a trade. I recommend waiting for a candle to close beyond both lines of the moving average cross before exiting the market. To illustrate this trading strategy, please have a look at the chart below:. RSI enters the oversold area with the bearish gap the morning of Aug Two hours later, the RSI line exits the oversold strategies generating a buy signal. An hour and a half later, the MA has a bullish cross, giving us a second long signal. Trading buy McDonalds as a rsi of two matching signals between the RSI and the MA Cross. Furthermore, this happens in the overbought area of the RSI. This is a very strong exit signal and we immediately close our long trade. This is a clear example how we can attain an extra signal from the RSI by using divergence as an exit signal. Now I will show you how to combine the relative strength index with the relative vigor index. In this setup, I will enter the market only when I have matching signals from both indicators. I will hold the position until I get an opposite signal from one of the tools — pretty straightforward. This is the minute chart of Facebook from Sep In this example, we take two positions in Facebook. First, we get an overbought signal from the RSI. Then the RSI line breaks strategies the downside, giving us the first short signal. Two periods later, the RVI lines have a bearish cross. This is the second bearish signal we need and we short Facebook, at which point the stock begins to drop. After a slight counter move, the RVI lines have a bullish cross, which is highlighted in the second red circle and we close our short position. This trade generated a profit of 77 cents per share for a little over 2 hours of work. Facebook then starts a new bearish move slightly after 2 pm on the 21 st. Unfortunately, the two indicators are not saying the same thing, so we stay out of the market. Later on, the RSI enters oversold territory. A few periods later, the RSI generates a trading signal. After two periods, the RVI lines also have a bullish cross, which is our second signal strategies we take a long position in Facebook. Just an hour later, the price starts to trend upwards. Notice rsi during the price increase, the RVI lines attempt a bearish crossover, which is represented with the two blue dots. Fortunately, these attempts are unsuccessful and we stay with our long trade. Later on, the RVI finally has a bearish cross and we close our trade. This is a setup, which should always be taken into consideration. Here I will use the RSI overbought and oversold signal in combination rsi any price action indication, such as: In order to enter a trade, I will need an RSI signal plus trading price action signal — candle pattern, chart pattern or breakout. I will hold every trade until I get a contrary RSI signal, or I get a price action indication that the stock move is ending. The chart image starts with the RSI in overbought territory. After an uptrend, the BAC chart draws the famous three inside down candle pattern, which has a strong bearish potential. With the confirmation of the pattern, we see the RSI also breaking down through the overbought area. We match two bearish signals and we short the BAC stock. The price starts a slight increase afterwards. This puts us into a situation, where we wonder if we should trading the trade or not. Fortunately, we spot a hanging man candle, which has a bearish context. We hold our trade and the price drops again. Look at the three blue dots on the image. These simple dots are enough to build our downtrend line. After we entered the market on an RSI signal and a candle pattern, we now have an established bearish trend to follow! The trend resists the price yellow circle and we see another drop in our trading. Later on after rsi decrease, BAC breaks the strategies trend, which gives us an exit signal. We close our position with BAC and we collect our profit. This trade made us 20 cents per share. I really believe that the RSI goes well with the RVI. In the RVI and relative strength index formula example, I find harmony between the two indicators and the way they smooth out the price action. Learn to Day Trade 7x Faster Than Everyone Else Learn How. Free Trial Log In. 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We need to emphasize this (for the first but not the last time) from a social perspective because our own society is not as attuned as ancient society to the process of honor.