RSI Trading Strategy
The RSI Trading Strategy is widely used for trading basic strategies and is also ideal for beginners. Read this article to understand in a few steps how to implement this technique.
RSI Trading Strategy Requirements
You need a few tools to apply this technique:
- ADX indicator
- Daily Pivot Points
Relative Strength Index may be applied in any Financial Market and it measures the strength or the weakness of an Asset trend; the Indicator also spot oversold and overbought areas.
This strategy it’s made to invest against the Trend taking advantage of Bounds and Reversals or just to avoid them; it has to be carried out for daily or longer trades. You can also use it with other timeframes, but here we explain the RSI Trading Strategy on a Daily timeframe.
RSI Trading Strategy Settings
The RSI Trading Strategy uses an Oscillator (RSI) that includes values between 0 and 100, the values to pay attention to are the ones above 70 points and below 30 points. For this method you need to set the Indicator to 14 periods with daily timeframe:
If the oscillator shows values over 70 points the Asset is considered overbought, so you should go against the current price direction and open a Short position because a Rebound or a Reversal Trend is expected to start.
If the RSI shows values under 30 points the Asset is considered oversold, so you should go against the current price direction and open a Long position.
We advise you to filter these signals choosing only the situations where a Divergence occurs, that is when the Asset price and Relative Strength Index Oscillator move in opposite directions:
When the values are over 70 points, the Asset price is still going upwards, but the values Indicator start to decrease, open a Short position
When the values are under 30 points the Asset price is still going downwards, but the values Indicator start to Increase, open a Long position.
Recommendations for the RSI Trading Strategy
For this strategy we combine with ADX with the Relative Strength Index “ADX Smoothing” set to 6 periods and the “DI Length” set to 12 periods plus the daily Pivot Point in other to confirm the signals but also to fix Take Profit and Stop Loss levels.
In any video I always emphasize that no matter the strategy that you want to follow, it is safer to include more than one Indicator on your studies.
Before any investment don’t forget to check the Economic Calendar; for Stocks check out also the Earning and the Dividend Calendar; this to avoid the unpredictable volatility generated by the release of the news that might negatively affect your investments.