Trading the RSI Indicator is as simple as finding the best RSI settings and then using it for momentum trading.
Ready to learn how to trade the RSI indicator effectively?
In fact, you can use it in day trading or momentum trading.
- What is an RSI indicator?
- Best RSI settings
- Momentum trading
- Day trading
How to trade with RSI indicator? You can trade the RSI indicator by lowering the period for day trading or using the 30-period. For day trading, traders can use the two-period to get the cumulative RSI. It is cumulative because the two-day RSI is summed up and then the signal occurs when the value is below 5.
Do you know the main oscillators used in technical analysis?
RSI is one of the most critical indicators in short-term and momentum stock trading because it assesses the price dynamics when you compare the current price to previous prices.
In my previous posts, I have shared the three technical indicators I use in the markets to find good set-ups, but now, I will share this powerful tool.
Well, I will be sharing two methods below to help you decide which settings to use.
The strategies are easy to set-up in your charting tool to start using it. Also, I will show you how to set it up in Amibroker to scan stocks.
However, you have to backtest the strategies in here to see if these are reliable.
The most common setting of RSI indicator is 14 in trading stocks and Forex. However, studies showed that it has no edge in the markets.
Have you used RSI before? What settings did you use?
If you are a beginner, you would have used the 14 periods because of what you read on trading books.
Also, you have been thought to use the 70 and 30 levels in the Relative Strength Index to determine oversold and overbought stocks.
You would have bought below 30 and sold above 70 when the indicator hits either one of them.
What did you notice afterward?
Well, it does not work.
When I started trading, I used the 14-period RSI, but now, I don’t use it anymore.
For example, buying at oversold levels in RSI14 did not work for me.
Do you know what I did?
Well, I tried buying at overbought levels.
Guess what happened next?
It did not work also.
What is an RSI indicator?
You can use RSI in stock trading to measure the speed and price movements. It is an oscillator in the chart with values between 0 to 100.
The most common use of RSI is using oversold and overbought levels in trading.
Traders use it daily to identify the trend of the stock.
J. Welles Wilder created the Relative Strength Index way back in the past to find good set-ups. Also, the indicator is still popular today because it is useful in day trading.
You can also use it with momentum base strategy, and I will show you how to use it below.
When I started trading stocks, I used the 14-period, but now, I only use 30 and 2.
Well, I found that it works better than the default settings because I can use it to find trend following stocks.
When you search the internet about RSI, you will see that 14-period is very popular, and that is the reason why it is unreliable.
In stock trading RSI, you should not use the default period to have the edge over other traders.
You are competing against other traders in stock trading, and what will happen if all you are using the same strategies?
Later on, I will talk about both RSI 2 and 30, but for now, I will explain how to compute it.
However, you don’t have to learn how to calculate it because charting tools already include it.
You can visit this site to find the formula. (Source)
That post talks about divergence signal in trading, and how you can use it. Also, reading that article will mislead you to follow the strategy they recommend.
You can test it yourself.
I have found that RSI14 has no edge in stock trading.
When I did not have Amibroker, I tested the settings for 200 trades, and now, I have known that it is not reliable.
Let me explain why I use only 2 and 30 below.
Is RSI a good indicator?
The best RSI indicator are the two-period and the 30-period based on our recent backtest. The backtest suggests that the lower period can find stocks that are oversold for day trading. The 30-period can also predict whether there is momentum in the short-term.
A lot of traders ask me, is relative strength index reliable?
My answer is yes in stock trading because I found out that setting it to 2 and 30 create correct signals.
Why do I say this?
When using RSI to trade, you’ll have a reliable confirmation to base your trading decisions.
In my experience, I made more money with the two and 30 periods RSI, but now I only use the latter because I don’t want to watch the charts all day.
My goal is financial freedom to have more time on the things I love.
I only trade from the RSI with 30-periods to stay away from day trading.
If your goal is day trading, you can use RSI2 daily to make profits in the market.
However, I will talk about momentum trading first because this is easy to do.
History also repeats in stock trading to ignore it. That is how strong stocks works to use it for your advantage.
I use RSI to gauge the speed of the stock to ride or go against it.
The less popular strategy I found in trading is Spyfrat’s technique.
In the stock market, he is trading with RSI only to detect parabolic stocks.
He uses the 30-period RSI to find parabolic stock, but, what are parabolic stocks?
Well, if you do not know it, I will teach you.
Parabolic stocks include these characteristics:
- Shares already reached the path of less resistance.
- Strong momentum
- Upward burst.
Traders have experienced a fast upward burst of the price of the stock at the parabolic stage.
You’ll usually see large candles in the charts when this happens. I have found that RSI30 can help you find good stocks to buy.
Today, I will show you how to detect these stocks in trading to find it before it happens.
However, you need a tool to find these opportunities.
I recommend Amibroker to scan these stocks, and you can search our website to read and watch many tutorials.
Here is an example of a parabolic stock.
Read below to learn the strategy.
What is a good RSI?
Today, you’ll also learn how to use the RSI indicator.
Momentum trading has been my bread and butter in the market. Aside from 52-week high strategy, I use RSI30.
RSI 30 is an RSI indicator setting that uses the 30-day period to measure the momentum of a stock. The momentum is seen as strong if the value of the indicator has crossed the 70 level. However, if the value is above 80, there is downward risk and there is a need to sell the stock.
Here are the rules:
- Buy 20% below 70 of RSI30 and Price is above MA200
- Sell 30% below 70 of RSI30.
- After the breakout, sell when RSI hits 80, or Weekly RSI hits 80.
I modified Spyfrat’s strategy in stock trading to anticipate breakouts.
In my previous post, I don’t like buying late, but I also want to catch strong trends.
When I use the Spyfrat trading system, I always add a margin of safety to lessen the risks.
You can also use this in day trading to anticipate breakouts. However, I use psychological levels instead.
The 20/30 result helps me improve my risk-reward ratio to grow my portfolio.
You add MA20, which I rarely use to find confluence in trading to increase your win rate.
Well, MA200 will filter only the strong stocks to remove the weak ones.
Usually, when the RSI hits 80, I sell half of my positions to ride the potential upside.
A breakdown at the 70 levels is dangerous because a parabolic burst can occur.
You have to sell the stock immediately to avoid significant losses.
Parabolic burst is a risk of sizeable downward movement of the price when you least expect it.
I have also written a post on this website to read the original strategy.
To trade this system correctly, the weekly RSI30 must reach 70 levels before the daily timeframe to filter fake signals.
I have found that if the daily RSI reaches parabolic status first, the momentum can easily wound up.
You search our website on how to use RSI effectively for more information.
However, you have to backtest this strategy in your free time to see if it works.
Sometimes, a trading system does not work in your country because it is already saturated.
Some traders add moving averages to filter only trending stocks.
Now, let’s go to day trading.
The Spyfrat trading system detects if the stock is in an uptrend or downtrend. Uptrend is reported if the if the price is above Bband and is also above RSI 50 using the 30-period. In contrast, a stock is in a downtrend if the price is below Bband and RSI 50.
The best indicator to use with RSI is the Bollinger band because if the price is above the Bands and the RSI is above 50, then there must be momentum in the stock, provided that the 30-period is set. If there is an uptrend momentum, traders can buy the stock even though the RSI has not reached 70.
Day trading 2-period RSI
How to use RSI indicator for day trading? Traders can also use the Relative Strength Index in stock trading to find daily opportunities.
However, I think day trading is not an excellent way to grow your account because it can take all your time.
You have to weigh whether you want to work full-time or become financially free.
Day trading requires a lot of work and money for you to sustain it.
However, RSI2 strategy will give you one percent profit per month to show you the real statistics.
If you add your income, it can reach 10% per year to grow your portfolio.
However, you can’t live with a $1,000 trading account because 10% is just $100.
How to use RSI in stock trading? You can use the RSI in stock trading by lowering the period to two(2). Then, you can add two days of data to get the cumulative RSI. If the cumulative RSI is below five it must be already oversold.
Okay, here are the trading rules:
- Buy if the cumulative RSI2 is below five and Price is above MA200.
- Sell if the RSI is above 65.
RSI2 is a mean reversion strategy to find divergence within the long-term trend.
I have backtested the system in different countries to find if it is reliable.
In this oversold stocks with improving RSI, you are using a shorter period to find the best trading opportunities.
Well, I was surprised when I saw the result to recommend this strategy to you.
You can find oversold stocks in the markets when improving the RSI settings.
The strategy works in every country to ignore it.
However, I don’t use it because the commissions can reduce profits, and I don’t want to trade daily.
As you go along, you can use other exit techniques in your stock trading to improve your win rate.
Some traders will use the time to sell their positions.
For example, you can exit your trades after three days no matter what happens.
I use the risk-reward ratio in my holdings to grow my account.
You should also scan for stocks with enough volume to look at liquidity.
I typically look for above 100,000 to exit my trades if the trade did not work out.
Traders lose money because they have ignored volume.
How many shares to buy?
Well, I buy 10% of the average volume to get out of the trade quickly.
I hope you learn about the Relative Strength Index today to use it properly. I did not know about it until my mentor gave it to me.
Is RSI the best indicator? Yes, if you set it correctly in your charts to find oversold stocks.
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You can also comment below to ask me some questions.