rsi indicator strategy

This means RSI on a daily chart outperformed the S&P 500 by 45% over 26 years. See the chart below for details on RSI buy and sell signals. Trading financial products carries a high risk to your capital, particularly when engaging in leveraged transactions such as CFDs. It is important to note that between 74-89% of retail investors lose money when trading CFDs. These products may not be suitable for everyone, and it is crucial that you fully comprehend the risks involved.

rsi indicator strategy

Additionally, the RSI becomes almost meaningless when significant news events impact the stock or sector. The market is anticipating a Biden presidential win, and with that comes increased renewable energy spending. You can see that the RSI stays “overbought” for 13 days, as shown below. There is no point at which the RSI of a security or asset is “good” or “bad”. Instead, interpreting the RSI depends on what you’re looking to accomplish, the current security trend, the market regime, and numerous other factors.


As expected, you may have several false signals before the big move. To that point, we’ll discuss different RSI trading strategies that may require you to modify these settings. The relative strength index (RSI) is one of the most popular oscillators in all of trading. You have likely read some general articles on the RSI in your trading career, or have at least heard about it. However, in this post, we’ll present four unique, profitable RSI trading strategies you can use when trading. Through practice and experience, traders can fine-tune their RSI trading strategies to achieve consistent profits.

For example, let’s test short-term and long-term RSI strategies on the S&P 500. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would be a situation where there is a bearish crossover, yet the stock suddenly accelerated upward. A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD line. Traders may buy the security when the MACD crosses above its signal line and sell, or short, the security when the MACD crosses below the signal line.

What is the RSI indicator?

If the reading is above 85, it’s considered a bearish signal as the asset is overbought. Also, notice how the RSI gets oversold in a rising and trending market. This is because it’s a relative index – as the indicator’s name implies. It only measures the relative performance over the last n number of days. If those days have shown little volatility, then even small changes in the price make the RSI leap up or down.

Within, you can change the period from the standard 14 to whatever you prefer. You can also change the “overbought” and “oversold” parameters as you wish. The Relative Strength Index (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.

There is a look back period, over which the RSI value is calculated. The default is 14 periods, but some people use custom periods. To make things interesting, I’m also going to do a quick backtest on the commonly taught method, using the EURUSD daily chart. This will give you a baseline and help you understand how trading with the RSI could be improved. Sign up for the newsletter to get tips and strategies I don’t share anywhere else. The code to the sector example above is below and on the Analyzing Alpha Github repo.

The 80% Confidence Level

When the price of an asset is above 70, it is a sign of a trend reversal, and you should exit long and enter short positions. On the other hand, if the RSI is below 30, you can take long positions. These natural phenomenon like the Fibonacci sequence have a way of working in trading markets. Good traders will wait for the first pullback before entering a long position — they won’t FOMO.

rsi indicator strategy

Learn how to use the RSI effectively and elevate your trading game. These are basically the RSI period settings you want to test. I personally find the 13, 21, 34, 55, and 89 numbers the best. This approach tends to work best on the H1, H4, and D1 charts. On the smaller time frames, there tends to be too much noise so the forecasts are less accurate. What we can see from this is that the RSI value where bounces occur, in this market, happens to be at the 19.74% level.

RSI and the Broad Market

If you want to receive an invitation to our live webinars, trading ideas, trading strategy, and high-quality forex articles, sign up for our Newsletter. The five EMA crossing from above to below the ten EMA affirms the RSI’s hint of overbought levels and a potential trend reversal. Conversely, a bearish divergence happens when the RSI creates an overbought reading, followed by a lower high that corresponds to the price’s corresponding higher highs. After determining the RSI settings, you now have to apply the indicator as part of your strategy. Now before you jump to conclusions, it’s important that you know RSI’s ideal settings for day trading.

Before you start trading with our entry signal, we will cover a few key tips to help improve your trading. Traders begin to look out for a short trade entry in this case. Conversely, StochRSI values below 20 imply that RSI is trading at the lower edge of the range, and a potential bullish turn may set in, a signal for a long position.

Interestingly, the standard setting of RSI 14 on a daily chart, widely recommended by supposed experts, only produced a 20% win rate. His team is also behind the Axi VIP portal, dedicated to continuing to guide and educate traders. These three go hand-in-hand to define how large your swing lows and swing highs are on the price chart. We need these because we want to create beautiful swing lows and swing highs. It’s important to open your mind up to the possibility that the default settings are not always the correct settings. Instead, it’s up to us to find the True RSI settings of the market.

Can the RSI be used for Buy and Sell Signals?

The relative strength index (RSI) indicator is one of the most widely used indicators in the market. It is used to indicate overbought or oversold conditions in a market. One common use of the RSI indicator in intraday trading is to identify the turning points reversal in the market. It can also be used to find entry signals for both long and short positions.

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