Today you’ll learn the best RSI settings for day trading. This indicator is popular to traders to find suitable set-ups.
- How do I trade RSI?
- What is RSI buy signal?
- Two-period RSI
- Moving average filter
- Exit strategies
The default settings of RSI in the technical charts are 14 periods because most software uses it.
However, I have not found an edge with that set-up because it does not work.
In the default RSI settings, the 14-period is not helpful in stock trading to use.
You can try it yourself with paper trading to see what I am talking about trying to tell you.
In a trending market, the RSI losses it’s value if you use it as a non-trend indicator. (Source)
On this website, I have written a post about how to use RSI effectively, but in this post, we will talk about day trading.
You can use the RSI indicator in both trending and consolidating markets to find good entry and exit signals.
Even though you can do that, I do not recommend it in stock trading to avoid more losses.
Most beginner traders do not know how to use RSI when looking at the charts.
They thought that if RSI14 is above 30; the stock is in a level that is oversold when analyzing the markets, but they are in a strong trending stock, and they sold their holdings too early.
So you can’t trust the 14-period RSI to find good trading set-ups.
Later on, I will show you the best RSI setting for day trading to let you see why it is profitable.
I use a short period because I have found it reliable in an up-trending market to look for short-term trading opportunities.
You also need a filter when scanning for a trade to eliminate weak stocks.
I use a moving average indicator to select only the best ones.
Well, you can only use RSI properly when you have software to scan the markets.
I use Amibroker daily to find profitable trades.
If you don’t have it, then you will have a hard time monitoring the stocks.
An RSI setting for intraday is not an exact setting considering that every security or asset has its behavior. The setting recommended for intraday is usually the two-period because of its immediate signal derived from price action. An example of price action is a sudden fall of an asset in two days.
What is RSI?
The Relative Strength Index indicator is one of the popular momentum oscillators in stock trading to follow the trend.
In 1978, J. Welles Wilder Jr. developed the indicator to evaluate overbought and oversold conditions in the stock market.
He introduced the Relative Strength Index in his book “New Concepts in Technical Trading Systems”.
The traditional interpretation of the 70 and 30 levels is still popular today.
Because publishers are still writing about the old methods to teach online or through books and courses.
When a trading strategy is popular, it rarely works in real trading, but there are some exceptions.
I use the 2-period RSI in stock trading when analyzing the charts to trade daily.
To clarify again, I use this strategy for my day trading to separate it from my long-term trades.
Read also: How to find low volatility stocks?
In my long-term strategy, I set the RSI to 30 to scan for stocks that have high momentum.
You can read more about it on this website to learn how I use the indicator in my long trades.
Okay, let us go back to our topic in this post to focus on day trading.
In this tutorial, I will use the daily timeframe to illustrate how to use the RSI strategy, but I have not used it in other periods.
The best periods you can use are short or long to become successful in using RSI.
When I came across Larry Connor’s book about 2-period RSI, I back tested the system he used in Amibroker to see if it is reliable.
When day trading RSI, have a hard stop somewhere to prevent large drawdowns.
So, I did a ten-year test to see the stats, and I have found that it works, but the system does not use stop loss to protect your trade.
Okay, let’s go to the strategy below to help you with your day trading.
Well, it is easy to follow this system.
RSI Indicator for Day Trading
I have recommended the RSI indicator for day trading and for short-term trading.
The recommendation is to use the cumulative RSI of two periods.
Cumulative RSI can detect short-term reversals that can give trading opportunities.
How do I trade RSI? (Tip Long Only)
You already know that RSI evaluates the overbought and oversold condition of the stock in the market to help a trader.
Well, you can sell companies based on the RSI signals.
However, I use it for long trades only in up trending stocks to avoid shorting equities.
Short Selling is not a good idea in the market because if you look at the major indexes, the trend is always up.
Why go against the underlying direction of the financial markets?
In stock trading, I enjoy following where the price is going, but in forex, I don’t do that often.
There are eight reasons shorting stocks is bad:
- There are unlimited losses
- You have borrowing fees
- It’s not good to bet against the market
- You must pay interest
- You pay and not earn dividend
- You can get squeezed
- Short sellers are subject to buy-ins
- The trend is not a friend(source)
Betting against the market is not a good idea in stock trading because you’ll have unlimited losses.
The market could go up for a long time to destroy your account.
Shorting stocks is the same as a borrowing because you will pay interest to hold the trade.
In trading, I want the market to be my friend to earn consistently, but beginners do not know this principle.
Do you want to go against the trend?
But Johndeo, there is also a downward trend of momentum. Why are you not using it?
Trading is already difficult to do, and if you add interest costs, you are making it more complicated.
I like to use a simple system when selecting stocks to unclutter my mind. Well, I even use a mechanical approach in the markets to remove my emotions.
In that way, I can decide when to buy and sell the stock to follow my plan properly.
RSI 2 trading strategy
I’ll show you how to use RSI for intraday trading daily to find trading signals.
The best RSI settings for day trading are two periods to find good setups.
I heard about it when I read Larry Connor’s book “Short term trading strategies that work.”
In his RSI 2-period trading strategy, you’ll be using the daily candle close to the search for trading signals.
When using RSI for day trading, you can’t use the higher period settings in the charts because it will become a lagging indicator.
If you want to learn more, go to our mean reversion page to watch the whole video about it.
In this best RSI settings for intraday, you can get trading signals by using the end of the day data.
He recommended traders should buy at the pullback instead of a breakout to increase your win rate.
Well, I think it was years ago, and I can’t remember it.
In this 2-period RSI pullback trading strategy, we are looking for long entries only to avoid the disadvantages of shorting stocks.
I back tested it, and it is a reliable system for day trading.
RSI Configuration (For Day Trading)
Here are the rules or parameters of the trading signal from the RSI oscillator:
- Buy, when the cumulative RSI(2) is below five; Oversold level.
- Sell, when RSI crosses above 65.
- Optional: Add a bollinger band indicator on the price or RSI. However, a back test is a requirement.
This strategy is simple in stock trading to implement. However, you need to have software like Amibroker to scan the markets.
Also, you can use other tools too to do the same.
In these RSI parameters for day trading, you can have high probability trades to increase your capital.
Before the stock exchange opens, you can filter stocks that meet your criteria to look for short-term opportunities.
In this best RSI trading strategy, you are using cumulative RSI instead of the simple RSI value. Does it sound an excellent system?
Well, RSI is like a rubber band to measure how far the current price had gone relative to the average.
If you stretch it more by using cumulative RSI, then you’ve got a high probability trade.
Based on my experience, I usually exit my trades in the markets after three days to take my profits.
You can compute the cumulative RSI by adding the two days. When the value is less than five, the stock has oversold, and it time to buy the stock.
Read also: Oversold stock meaning or definition
An accumulated RSI means a stretched out stock in the market when the value of both RSI is below five.
The settings do not use a stop loss to increase the likelihood of success.
RSI uses the close price to calculate the value and remember to use only the daily charts.
I have not tested the strategy in an intraday timeframe to focus on the higher time frame.
To learn cumulative RSI, I created a video on my YouTube page or you can search my post about mean reversion strategies.
Is this trading system new to you?
In this RSI day trading, you need to learn when to get out to increase your profits.
Below, I will show you the different exit strategies when trading this method, but don’t forget that you have to monitor your trades.
You can’t use stop-loss here, and you should not leave your screen to prevent a catastrophe.
Day trading is difficult to do because you need more time to monitor your trades.
Larry Connor’s exit strategy is through strength to make sure that there are buyers.
If you sell on weakness, who is going to buy?
Here are the exit rules:
- Fixed time.
- Sell, when RSI is above 65.
- Close above MA10.
- First up close.
He does not recommend the fixed time exits because it is not selling into strength.
If you’re a big hedge fund trader, where would you exit your trades?
Of course, you’ll exit when liquidity is high to hide your trades, but the unsuspecting traders will never know about it.
Professional traders have this thinking to avoid being fooled by the market.
In the stock market, I have found that selling when the RSI is above 65 is the best, but be careful because you are not using a stop loss.
To be profitable, read Larry Connors’s book, but to implement it you need Amibroker.
The tool can help you in scanning the markets to use this strategy.
Your trading platform does not have this capability to execute this system.
So, I recommend you purchase a tool to help you.
When I started trading, I thought I could do it manually, but I was wrong.
Professional traders use tools to improve their entries and exits.
Also, they may have developed to quantitative trading to increase their profits.
Trading has become complex over time because of the development of trading tools.
If you do not have one, then you are years behind from professional traders.
Only beginners use manual trading in the stock market.
Do not be like them to shorten your learning curve.
The tool is expensive to buy, however; you need it in your daily scan.
Okay, enough with tools because I know you know what I mean.
Moving Average Filter
Before I forget, you should only trade in an uptrend stock.
You can use RSI(2) with a strong momentum, to filter out the weak ones.
This strategy, with a RSI period of two, will never work in a downtrend market because when I back tested it, it failed.
I use the 200-period simple moving average to see if there is strength in the stock, although there is an RSI divergence.
The type of divergence, in this case is bullish divergence, because the RSI is at the moment oversold yet the price is above the moving average.
Larry has recommended that price must be above MA (200) to identify strong momentum.
In all my trades, I usually use this filter, considering it is one of my favorite trading indicators.
Pullback trading needs a strong trend to support the strategy.
You can’t ride the trend without strength in it because there is no power.
When I first read Larry’s book, I missed the filter he used in his trades.
I traded several stocks in the market only to find out that it is not working.
So, I reread the book after a series of buying and selling to see if I had missed something.
Yeah, I know I did not use the 200-period moving average on the price chart and stock screener.
Luckily, I increased my profits in stock trading when I started using the filter.
It helped me a lot to remove weak stocks from my trades.
Have you heard the trading mantra, “The trend is your friend?”
Well, it is true in my experience to ignore it.
What category does this strategy belong to?
Well, it is a mean reversion strategy in the stock market.
When the 2-period RSI is below 5, there is a divergence from the long-term trend, but the price is still above MA(200).
I’ll be adding this strategy in our mean reversion post to share it with you.
Just go to the homepage to see more of the trading system.
I hope you learn something today to share it with your favorite social media channels.
RSI Research in Action
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