- Determining the Trend using RSI
- RSI indicator trading strategy, 5 systems + back test results! - HumbleTraders
- RSI Indicator Explained – What is the RSI Indicator?
- RSI Indicator - Relative Strength Index
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- Relative Strength Index (RSI) Indicator for Day Trading: How to.
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If this figure reaches or exceeds 70 then the underlying asset is regarded as being overbought. If it reaches or dips below 30 then it is regarded as being oversold. In both instances a reversal is thought to be imminent and so overbought conditions prompt selling activity while oversold conditions prompt buying activity. Trade Responsibly. CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.
CFDs and Spread Betting are complex instruments and come with a high risk of losing money rapidly due to leverage. You should consider whether you understand how CFDs and Spread Betting work and whether you can afford to take the high risk of losing your money.
EN English. Create Live Account. Need Help? Even when combining it with other confirming studies, it is necessary to use a stop loss to protect losses on our trade. The optimal place for your stop loss order is beyond a recent swing top or bottom, created at the time of the reversal you are trading.
Again, this could be an overbought or oversold signal, as well as bullish or bearish RSI divergence. But in the practical sense, it makes sense to take your partial or full profits out earlier using other price action based rules or a trailing stop loss. Let take a look at how a basic RSI trading strategy with the rules we discussed earlier could work.
The image shows you a trade entry and exit based solely on signals coming from the Relative Strength Index indicator.
The chart starts with a price decrease which is also confirmed by the bearish direction of the RSI line. Suddenly, the RSI line enters the area, creating an oversold signal. Shortly afterwards, the RSI line starts increasing, while the price action continues its downward movement.
Determining the Trend using RSI
This creates a bullish divergence between the price action and the Relative Strength Index. Your first thought might be that you should open a long trade at the moment when the RSI line breaks the oversold zone upwards. However, during this time, you identify the bullish divergence, meaning that it might be better to wait for two or three bullish candles in a row as the actual entry signal. You should place a stop loss order right below the bottom created at the moment of the reversal. This is shown with the red horizontal line on the chart. The price action increases afterwards and enters a bullish trend.
The RSI line increases as well. The trade could be held at least until the RSI indicator reaches the 50 mark, at which point you could close a portion of your position. Alternatively, you could decide to use some other price action clues that provide sufficient evidence to close the trade.
RSI indicator trading strategy, 5 systems + back test results! - HumbleTraders
But absent that, it would be wise to exit the trade in full when RSI reaches the overbought threshold of The red circle on the chart shows the moment when the RSI indicator enters the overbought area, creating a close signal. Using the RSI indicator in isolation will not likely create a profitable trading strategy over the long run.
As with most other leading indicators, the Relative Strength Index can be prone to giving false signals. Therefore, you should incorporate an approach that will allow you to isolate as many false signals as possible, increasing your Win-Loss ratio. In this next section, we will discuss some of the way you can use the RSI tool in combination with price action to increase your chances of a winning trade.
- Conclusion: Know what price is doing!
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You would look to open your trade when you find a RSI signal confirming the direction. However, you will also confirm the price direction with a price action pattern.
RSI Indicator Explained – What is the RSI Indicator?
This could be a candlestick pattern or a chart pattern, as well as a trend line, channel, ascending or descending tops and bottoms, etc. The stop loss order should be positioned according to the basic RSI rules we discussed above. When you identify the turning point on the chart, you should place your stop above that most recent swing.
When you see, an opposite signal coming from the RSI, you should close your trade on the assumption that the price action is likely to reverse. However, if you spot a price action clue that provides evidence for the end of the price move, you should also take that into consideration for closing the trade. The image illustrates 5 trade setups based on RSI signals combined with price action.
RSI Indicator - Relative Strength Index
The price enters a consolidation afterwards creating the blue triangle on the chart. The triangle breaks through the lower level creating an exit signal. A closing signal appears when the RSI line enters the overbought area. The stop loss of the trade should be positioned above the top of the Expanding Triangle. The position should be closed when the RSI line enters the oversold area. The stop loss on the trade should be positioned below the bottom of the Expanding Triangle. You could exit the trade when the RSI enters the overbought area. Then you should place a stop loss order above the top of the range.
Your trade should be closed when the RSI enters the oversold area. Download the short printable PDF version summarizing the key points of this lesson….
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