RSI Trading Strategy in Detail Trading with Smart Money

The RSI tends to track the highs and lows made in the price. By comparing the magnitude of recent gains to recent losses, the RSI generates a value from 0 to 100 that reflects the strength or weakness of the asset’s price momentum. During trends, the RSI readings may fall into a band or range. During an uptrend, the RSI tends to stay above 30 and should frequently hit 70.

The idea is to combine the default 14-period RSI with support/resistance zones. Our aim is to find intraday reversal setups with a high reward-to-risk ratio. Another way to trade with RSI is to look for divergence between the RSI and the market price.

Top trading conditions

Like all indicators, the RSI is not always accurate, meaning that you should always be cautious. Therefore, when the indicator moves below 30, it is said to be oversold. Moves below 20 signals that the indicator is extremely oversold. On the other hand, a move above https://www.bigshotrading.info/ 80 is said that it is extremely overbought. The below shows how to change the various settings in the FlowBank trading platform. When trading, it’s important to keep in mind that RSIs have limitations, and traders are also responsible for making their own decisions.

Typically, an RSI less than 30 is considered a bullish sign, while RSI above 70 is regarded as a bearish sign. Conversely, an RSI of 30 or below suggests an oversold or undervalued condition. The average gain is the average of how much the price has increased from each of its low points within a time period.

The truth about RSI indicator

An overbought market indicates a reading above 70, and an oversold market indicates one below 30. A value above 50 indicates an uptrend in the market, whereas a value below 50 indicates a downward trend. An increase in its lower price usually accompanies a stock’s price increase. When there is more volatility and the market moves, the band widens, and the gap decreases when there is less volatility. To understand a stock’s price range, traders use Bollinger bands. Once done you can select your time period at the bottom bar.

The market has made a swing so you’ll exit the trade after one bullish swing. So don’t just blindly buy when RSI is below 30 and don’t just blindly sell with RSI is above 70. But a key idea here is, in the stock markets, the RSI indicator works well based on my own research. When RSI is below 30 it’s telling you that there is strong bearish momentum in the market. And as you know, pullbacks are usually short-lived, it doesn’t go down forever. Then you can just trade in the direction of the trend symbol.

RSI Strategy for Swing Trading

Once there are 14 periods of data available, the second calculation can be done. Its purpose is to smooth the results so that the RSI only nears 100 or zero in a strongly trending market. In this article, we have looked at what the Relative Strength Index (RSI), how to set it up, and some of the strategies you can use to trade it.

The larger the gap between these lines, the stronger the trend in either direction. I prefer to ignore the 50 level and add a long-term moving average on the RSI, in order to filter the bad signals. I will also confirm the signal with the same technique used in the previous strategy, a trend line breakout. Because remember when the RSI value goes down lower, there’s a stronger bearish momentum in the markets as the average loss is much larger than the average gain.

Trading Strategy: How to Use RSI for Swing Trading/Position Trading

But as I’ve mentioned earlier, you don’t want to just blindly buy. You don’t want to jump the gun too early and then swallow the pullback as the market goes against you. You can consider entering your trade after the price has broken the previous day high, maybe using a buy stop order. Yes, there are times the market goes into recession, the stock market is in a downtrend, but it doesn’t happen often, maybe once every 10 years.

• Another way to trade with RSI is to look for divergence between the RSI and the market price.
• The RSI will rise as the number and size of up days increase.
• Even though it has been established that the RSI can be used to predict price reversals, the RSI can’t determine when such reversals will occur.
• The crypto world provides a lot of opportunities to get a return on your investments and increase your wealth.
• If RSI swings lower but the price continues higher, this could be a sign of a short-term trend reversal.
• The default among many platforms is that the RSI uses the closing prices.

A movement from above the centerline (50) to below indicates a falling trend. A movement from below the centerline (50) to above indicates a rising trend. If you apply these other types of markets, like maybe GBP/JPY and if you just buy just because RSI is below 30, you’re going to suffer quite a bit. The market at the first point also had its RSI below 30, but it turned out to be a losing trade where https://www.bigshotrading.info/blog/how-to-use-rsi-indicator-in-forex-trading/ the market rallied a little bit before it reversed lower. As I mentioned, whenever the RSI is below 30 it’s a sign to you that the market is a staging steep pullback and the last thing that you want to do is to go short. And just because the RSI is below 30 doesn’t mean you want to buy because you still want to wait for confirmation that the buyers are stepping in before you enter the trade.