Some traders deal with this problem by lowering their time-frame. Others lower the RSI period setting to get a more sensitive oscillator. However, these solutions produce RSI signals that are more unreliable. Traders are also encouraged to experiment with longer or shorter periods to suit their trading style and risk tolerance.
Now, if you’re a high-frequency trader you can use a short-term period if the RSI is applied on the 5-minute chart or even the 1 minute time frame. As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it bounced higher. Using the RSI in this way is very similar to drawing trend lines on a price chart.
Conclusion: Is RSI a good indicator?
You can also add new levels should your trading strategy require so. Usually standard overbought and oversold levels are 70 and 30. If the indicator’s line goes above the 70 level, it signals that market is overbought and the trend may reverse downwards. If the indicator’s line goes below the level 30, it signifies that market is oversold and the trend may reverse upwards. Sometimes, overbought and oversold levels are set at 80 and 20 instead of 70 and 30.
Usually, the RSI trendline breakout precedes the price, because momentum precedes price. Without correct settings, even the best trading ideas can end up in disaster. However, before we get into that, we need to make sure the RSI indicator is in tune with the medium-term swing trends.
RSI Trading Strategy Best RSI Setting for Day Trading
In essence this a trading method to buy the dip and sell the rip. Of course, the price will get to these extremes less frequently than 30 and 70, thus in theory offering the most reliable trading signals. The main disadvantage to using 20 and 80 for RSI is that it means missing some potentially good trading opportunities. Some traders consider it a buy signal if a security’s RSI reading moves below 30. This is based on the idea that the security has been oversold and is therefore poised for a rebound.
- True reversal signals are rare and can be difficult to separate from false alarms.
- For instance, in an uptrend, traders will look to enter buy trades after a pullback that will be indicated by an oversold RSI reading.
- Also, go into the RSI setting and change the threshold lines in the indicator to 80, and 20.
- Below we have a reading that hit the 20 line on the RSI and was the low of the last 50 candles.
Traders should also use additional technical analysis, such as moving averages and price action, to confirm the trade entry and increase the probability of a successful trade. The RSI compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart. Like most technical indicators, its signals are most reliable when they conform to the long-term trend. To implement this strategy, traders can use the 8-period RSI indicator and set two threshold levels at 80 and 20.
Combined Strategy using Stochastic + RSI
However, the RSI trading strategy can be profitable for any trading with discipline and practice. For intraday signals, we need to make the RSI indicator more sensitive to the short-term price action. The RSI is one of the most common trend indicators you will find online. It can also be used with your forex trading strategies if it is your market of choice. Using the Relative Strength Index, you can identify whether a price trend is overbought or oversold. The RSI Trading Strategy is used as an RSI stock strategy, RSI forex strategy, and an RSI options strategy.
Traders who see indications that a security is overbought may expect a price correction or trend reversal. Bollinger Bands is a volatility indicator whose bands squeeze when there is low volatility but diverge when there is high volatility. Periods of consolidation are usually followed by massive breakouts, which makes any Bollinger Bands squeeze a vital time to watch the markets. A breakout signal will be delivered when there is an RSI overbought or oversold failure swing. For instance, a bearish signal happens when the RSI line rises above 70 and then falls below 70 again. You could open a sell position when the prices touch the lower Bollinger band.
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In fact, Wilder says in his book that he tested multiple time periods and found 14 to be the most effective for his swing trading style using daily timeframe charts. So his choice of technical indicator settings was based on real evidence from his day trading. An RSI trading strategy using the Relative Strength Indicator is a great place to start when day trading and forex trading. As a momentum indicator, the relative strength index compares a security’s strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give traders an idea of how a security may perform.
In his book “New concepts in technical trading systems,” Wells Wilder only uses trading strategy examples with the 14-period RSI. The moving average convergence divergence (MACD) is another trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA.
When your alerts sound off, take a closer look to assess the quality of the trading setups. The default RSI setting of 14 periods work well for swing traders. But many intraday traders find it lacking, because it produces infrequent trading signals. Some traders may prefer to use shorter or longer periods depending on the market they are trading, their risk tolerance, and their trading goals. It is important to test different RSI settings on a 1-minute chart to find the best one for your trading strategy.