RSI Indicator: Buy and Sell Signals

How to Use RSI Indicator

For example, well-known market technician Constance Brown, CMT, proposed that an oversold reading by the RSI in an uptrend is probably much higher than 30. Likewise, an overbought reading during a downtrend is much lower than 70. Our test results on 1-minute charts show a low success rate of 20 percent, and a 5-minute chart had a 23 percent success rate. You can develop and test your own original day trading RSI strategy by backtesting with TrendSpider. The RSI indicator is relatively accurate, especially with a standard OHLC, line, or candlestick chart.

The ideal position to place the stop loss is below the recent swing low for long trades and the recent swing high for short positions. When trading using the RSI, you want to ensure you are trading with the general trend. For instance, you should go long after the indicator breaks out of the oversold area.

What is the best time frame for RSI?

And to achieve this, you’ll sell into a rally as the price moves higher. This is an RSI trading strategy that swing traders will love. When the price moves up quickly with little to no pullbacks, your average gain is large because the price is making positive gains—which leads to a higher RSI value. When divergence occurs, the theory states that there is a higher probability of price reversing. This could present potential short-term sell and buy signals.

It measures the speed and change of price fluctuation on a scale of 0 to 100, providing insights into overbought or oversold conditions, as well as potential trend reversals. The RSI and stochastic oscillators are both momentum indicators. However, the different mathematical formulas create different results. The RSI is looking at the average gains against the average loss over a set number of periods.

How to Trade RSI: Buy & Sell Signals?

Welles Wilder, that helps traders evaluate the strength of the current market. The tricky thing about divergences is that the reading on the RSI is set by price action for that respective swing. If you are new to trading, combining the relative strength index with another indicator like volume or moving averages is likely a great start. This is the second bearish signal we need and we short Facebook, at which point the stock begins to drop. A regular crossover from the moving average is not enough to exit a trade.

  • One thing to keep in mind about failure swings is that they are completely independent of price and rely solely on RSI.
  • It is primarily employed by traders and analysts to indicate possible overbought or oversold conditions in a market.
  • We also thoroughly test and recommend the best investment research software.
  • This indicator operates on a scale of 0 to 100, with levels typically marked at 70 (overbought) and 30 (oversold).
  • The goal is to hold every trade until a contrary RSI signal presents, or price movement confirms that the move is over.

The displaced moving average is a regular simple moving average, displaced by a certain amount of periods. As you see, there were multiple times that BFR gave oversold signals using the relative strength indicator. Once you progress in your trading career, you may want to look to methods using price action that are more subjective. At this point, you may be able to apply techniques specific to the security you are trading, which could increase your winning percentages over time. After a slight counter move, the RVI lines have a bullish cross, which is highlighted in the second red circle and we close our short position. This trade generated a profit of 77 cents per share for a little over 2 hours of work.

#2 – RSI + MA Cross

Well, the calculations that go into the stochastic indicator and the RSI indicator are different. Thomas J Catalano is a CFP and Registered Investment Adviser with the state of South Carolina, where he launched his own financial advisory firm in How to Use RSI Indicator 2018. Thomas’ experience gives him expertise in a variety of areas including investments, retirement, insurance, and financial planning. The blue arrows show the points when the pair was oversold while the red points show when it was oversold.

How to Use RSI Indicator

When a security makes a high followed by a second higher high, then the first high becomes a bearish reversal pivotal point. Suppose the security’s price falls below that pivotal point, and RSI is still above 70. In that case, it is probably time to sell the security and maybe time to sell it short. Furthermore, Livermore’s pivotal points can also be used with smoothed RSI for better-defined uptrends and downtrends.