Based on my testing, divergence usually gives you better results than the vanilla RSI method. But again, it all depends on your profit target and risk per trade. Looking at the profit chart, it traded flat for a long time, before finally starting to make some profit at the end. So this test was not successful and is not worth trading live. OK, if you aren’t familiar with how the RSI is usually traded, I’ll go over that real quick.

Therefore, the RSI is most useful in an oscillating market where the asset price is alternating between bullish and bearish movements. RSI is most accurate when looking at stocks where the index has conformed to long-term price change. Some intraday traders find it useful to shorten the smoothing period of RSI down from 14 to a lower value.

After the price falls following the indicator signal the indicator starts to point higher in what is called bullish divergence. The change in direction of the indicator is taken by forex traders or other traders to mean that price movements might be about to follow in the same direction. The oscillator in this scenario is a leading indicator for the price. ” Wells Wilder only uses trading strategy examples with the 14-period RSI. The developer of the RSI, J. Welles Wilder Jr. recommends using the 14-period RSI. Remember that we used RSI to find support and resistance levels.

What is the Oscillator?

This is the most common trading strategy that’s proclaimed online, and as a matter of fact, it at least has some merit to it. At least it does work, although perhaps not well enough for us to trade it ourselves. Some markets simply don’t work too well with mean reversion strategies, since they are not mean reverting by nature. However, that doesn’t need to mean that the RSI cant be used for that market.

This strategy targets 25 percent return as profit and a tight stop loss of ticks. In the oscillator as oversold and overbought levels respectively. Shane his trading journey in 2005, became a Netpicks customer in 2008 needing structure in his trading approach. Shane started day trading Forex but has since transitioned to a swing/position focus in most markets including commodities and futures. This has allowed less time in front of the computer without an adverse affect on returns.

The movement of overbought and sold levels in the RSI depends on the period values. A low length will cause the indicator to abruptly move up and down with no significance. Generally, the 14-period Relative Strength Index is the favorite https://1investing.in/ choice of most investors as it provides a suitable balance in movements. Remember that the 80 and 20 values are just for reference here. The criteria of overbought and sold conditions can change as per the liking of a trader.

RSI can be challenging to understand, but we’ve cut the math and concepts down to the essentials to get you started right away. I copied the version of @Yidu_A_S_O_T_L_J_C and modified the stair calculation and removed the support and resistance lines I noticed that the stair calculation was off. The original version takes a default fractal and with the input Stair sensitivity moves the fractal left or right. Add the RSI indicator and change the settings to 2 periods.

RSI Exits

That’s why we test before ever risking real money with a strategy. This strategy is a bit more subjective because it can be tough to know when price is trending. For example, the bearish pullback in a buy trend is calculated using the Fibs. The RSI indicates the reading between the 50 and 80 proving that the bulls are still in charge.

• RSI can be used in stock trading to find cues for opening trade orders—but sometimes the indicators fall apart.
• This is an oldie but goodie, and is still applicable to the RSI indicator.
• The most common way of doing this is to require the RSI to cross below or above a threshold.
• The overall structure of the counter is very lucrative, as it is trading above all of its important moving averages.
• In some instances, the RSI value is located on the chart relative to the selected stock price.

There are many ways a trader can trade in the stock market; they can swing trade, day trade, or short the market. However, traders need to be knowledgeable about trading and understand the different strategies and tools available. Here at Simpler Trading, we opened theSimpler Free Trading Room, where traders like yourself can sign up and trade with a professional trader for FREE! Sign up today and see what it’s like to trade in the Simpler Trading community. The stock price has given a breakout of the Cup & Handle Pattern on the daily chart with higher volume. The overall structure of the counter is very lucrative, as it is trading above all of its important moving averages.

RSI as a Momentum Indicator

Once you’ve added the second timeframe, you just apply conditions to it as you would have done to the first timeframe. So in effect, the buy condition is that we have three consecutive bars with lower RSI readings. To get the RSI value, these three values are then added to each other, and divided by three.

For example, if the RSI made a reversal at 80, we might watch the RSI break 80 to take a position to the long side. Conversely, if the RSI made a reversal to the upside at 20, we may watch bureaucracy the 20 – level, and go short if RSI crosses below 20. RSI StrategyThe yellow circle at the bottom signals our entry, and then we wait for the RSI to rise above 70 to exit the trade.

A Trading Strategy Is Just a Set of Rules

This is the critical half of all investment and trading outcomes. This has been the death of many people’s portfolios as they watch a stock that was “oversold” become even more “oversold” as it continues to plummet. Screeners which are helpful for stock picking are available in the trading view platform.

The most common settings for the RSI indicator is a 14-days lookback period with the oversold threshold set at 30 and the overbought threshold set at 70. However, the RSI can be tweaked, and the inputs can be changed to work better with the specific market you’re working with. Sometimes, different trading styles may require different RSI settings. We encourage everyone to experiment to see what seems to work the best.

It’s advantageous to be short on bearish trends like this. This means you can capitalize on the recent highs while betting against the asset. The changes can happen quickly, so it will require you to pay close attention to the market. The best way to learn these trends comes from practicing with paper trading before rolling it out with any of the top brokers specifically for day trading. If we look at more speculative security from a similar period, the RSI will reflect more extreme trends. During January 2021, the RSI reached nearly 100— this is an extreme sign that the asset is overbought, and a return to more neutral activity is inevitable.

Without proper risk management, you will certainly receive a margin call on your account sooner or later. While RSI provides a reasonable winning rate in good market conditions, it has its limitations and will not work 100% of the time. It is also important to have a sound mindset as it constitutes 80% of the total regime. It won’t be wrong to say that RSI is a universal indicator that can work on most instruments.