Relative Strength Index (RSI) is an oscillator that shows strength of momentum in price for a defined period of time. Default value is 14 period and if the candle is of 5 mins it will calculate and show you strength of momentum from last 70 minutes. RSI is always in the range of 0 to 100 where value less than 30 is considered as oversold and more than 70 is considered overbought.
How to use RSI - RSI shall never be used as a single oscillator to decide trades, it is always preffered to use it in conjunction of some other indicators like moving averages etc. For simplicity, if RSI goes below 30, consider that stock is moving in oversold state and keep it on your trade watch list, when you see an opposite direction movement where RSI starts moving upside and crosses above 30, if other indicators are showing the same trend reversal you can go long and once RSI moves above 70, you can start taking partial profits. You can do exactly opposite for a short trade where RSI will reverse from level above 70, cut below it and if other indicators are in favor.
Always remember that RSI is a lagging indicators which calculate values based on past data and does not guarantee that trend reversal will only happen in oversold or overbought zones only. It may happen that a stock has RSI more than 70 and stays in overbought zone for days (super bullish trend) or below 30 and stay in oversold zone for days (super bearish trend) + it can stay in the range of 30 to 70 (no trade entry zone) for even months.
As always bigger the chart time frame better the results with RSI
If used effectively, RSI alone can give you wonderful results on your trades.
Quick byte - *only applicable for ultra scalpers*
Use 2 minute candle and 7 period RSI
1. When the RSI become 0 buy with stoploss just below the last candle and exit in 2-4 minutes with whatever profit you get.
2. When RSI become 100 sell with stoploss just above the last candle and exit in 2-4 minutes with whatever profit you have.
To join us on whatsapp fill your data in below form - reference - 'Trading Terminology Blog'
Like us on Facebook
This comment has been removed by a blog administrator.
ReplyDelete