Today, you’ll learn how to scan for relative strength.
- What is the relative strength index?
- RSI overbought and oversold
- Scanning RSI
- Using RSI to find high momentum stocks
One of my students asked me, “Can I scan RSI in the stock market to earn money?.”
If you want to become a professional trader, you have to use a screener to find profitable trading setups.
How can you know when to buy and sell a stock?
There are thousands of stocks in the stock market to filter the best ones.
When I started trading, I could not use my trading system properly because I did not know how to apply it.
I was looking for buying opportunities by moving from several stock charts to find good entries.
However, it was tough in the past because there are so many stocks to select the best.
Well, I was a newbie back then to know what I am doing.
Now, I will show you how to scan for relative strength with Amibroker to find high probability trades.
However, let’s talk about the RSI first to understand how to use this indicator.
I use the Relative Strength Index in the stock trading to find oversold and momentum stocks.
In the past, I use the 2-period RSI to scan for profitable short-term setups.
Usually, I use RSI(30) in the stock charts to alert me about momentum stocks.
Well, I will show you how to do it in Amibroker later to show you how easy it is.
I recommend this tool in stock trading because it is affordable.
However, you have to get reliable data from the stock exchange to use it correctly.
You do not want to have wrong trading signals from the tool to avoid losses. Okay, let’s learn what is the Relative Strength Index first to use it properly.
What is the Relative Strength Index?
J. Welles Wilder created the Relative Strength Index(RSI) in the past to measure the speed and change of price movements.
He is popular among mean reversion traders because of his indicator useful to them.
Trend traders also use RSI to follow the direction of the market. However, they use a more extended period instead of 14 to modify the traditional setup.
Well, if you go to any trading websites, you’ll see that traders always talk about the Relative Strenght Index.
You can see the formula below to compute it accurately:
However, RSI is available in stock charts, so you don’t have to calculate it manually.
The indicator oscillates from -100 to 100 in the stock charts to show overbought and oversold levels.
When you do your research, you’ll notice that RSI14 is the default setting because that is what most trading website teaches.
Most traders will consider the stock oversold when the Relative Strength Index is below 30 to trigger a buy signal.
Conversely, an overbought signal happens if the RSI is above 70.
Professional traders change the traditional setup in the stock chart when using the indicator to make it reliable.
To know the correct setting, they use tools like Amibroker to backtest the indicator.
If you use RSI14, you’ll lose money in stock trading because it creates a lot of false signals.
Most traders use the indicator with divergence to try anticipating reversals.
However, it is tough to do in the stock market because the signals are wrong usually.
If you watch videos on YouTube, you might think divergence trading with Relative Strenght Index is easy to do.
In reality, it is challenging to apply the system when trading in the stock market.
RSI overbought and oversold
When I search for an RSI indicator, I can see that RSI 30 and 70 levels are always discussed to know what is real.
Well, trading websites consider the first as overbought while the second is overbought, respectively.
However, I can not find any edge in that strategy because the default period is often 14.
When you use a popular setting, your edge is small in stock trading to get high probability trades.
You have to move away from the crowd when looking for good set-ups to improve your entries and exits.
If you follow popular strategies, you will never make money. (Source)
Also, you’ll have difficulties when you are using what is common because professional traders will take advantage of you.
Well, do not discourage yourself when you have followed the crowd before to improve your stock trading.
You can always find another way in the markets to earn profits.
However, you’ve got to move away from herd mentality to avoid wrong thinking.
If you want real trading systems, you can go to our recommended trading strategies page above to learn more.
Okay, let’s go back to our topic today to scan Relative Strength.
I will show you how to scan RSI below to teach you.
However, you need to use Amibroker daily to start finding trading set-ups.
If you don’t have it, you’ll have difficulties scanning the markets.
Professional traders have trading tools with stock trading to assist them.
You can’t find profitable trading set-ups without a scanning software to find high probability trades.
Of course, you can use other tools in stock trading to look for possible trading entries and exits.
In this post, I will show you how to scan relative strength to make it easier for you. You can also watch below to see it in action.
I use an RSI with a two-period in Amibroker to demonstrate relative strength.
You can watch the video below to see how I do it.
When I started stock trading, I did not know how to scan good setups to increase my win rate.
Also, if I had not learned about Amibroker, I would still be paying services to alert me for possible entries and exits.
The tool is so powerful in stock trading and you can use it on other trading systems to increase your win rate.
Also, the code is simple to do in the editor to set your trading system.
In the video above, you can search stocks daily with two days RSI below five to look for oversold stocks.
You can go to our mean reversion post for more details. Also, you can use it for short term trades and swing trading to catch three to five days price move.
Moreover, you can also add MA200 in the filter to get only up trending stocks.
You can use this scan in a no commission broker to increase your profits.
I have backtested this strategy in different stock exchanges to see if it is reliable.
However, you have to test it yourself to know the real results.
Although this may be true, you need to use proper risk management to manage your portfolio.
I like the shorter period of RSI in stock trading to find oversold stocks, and you can use this strategy daily to follow the shorter trend.
Sometimes, you can not find momentum stocks in the market to use oversold stocks instead.
Moreover, you can use pullbacks or breakouts in the stock trading to earn in the markets.
I use RSI for oversold and breakout stocks to find good entries and exits. Okay, let’s go to momentum trading using the Relative Strength Index.
You can scan relative strength with Amibroker to find good trading setups. Of course, you can use other stock screeners to use an alternative.
However, I found that Amibroker is more powerful, and it is cheaper in the long run.
You don’t have to pay monthly fees on service providers to reduce your trading cost.
Also, data is available for free in the stock exchange when you know how to import it.
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