Trade Stock Indices

RSI Strategy

Relative Strength Index or RSI is one of the most popular Indices indicator used in Index trading. It's an oscillator indicator which oscillates between 0 -100. This a trend following indicator. It reflects the momentum of the market trend, values/readings above 50 show a bullish trend while values below 50 show bearish trend.

RSI Measures Momentum of a Index Trend.

The center line for the RSI is 50 indicator, crossover of the center line indicate shifts from bullish to bearish trend and vice versa.

Above 50, buyers have greater momentum than the sellers and price on the chart will keep going up as long as this RSI technical indicator stays above 50.

Below 50, sellers have greater momentum than the buyers and price on the chart will keep going downward as long as RSI indicator stays below 50.

RSI Trading Indicator Strategies - How Do I Trade with RSI Index Indicator?

RSI - How to Trade with RSI Indicator

In the example presented above, when the indicator is below 50, price kept moving in a downward Index market trend. The price continues to move downward as long as RSI technical indicator was below 50. When RSI indicator moved above 50 it showed that the energy had changed from sell to buy & that the downward Index trend had ended.

When the RSI indicator moved to above 50 the price started to move upwards and the trend changed from bearish to bullish. The chart price continued to move upwards and the RSI indicator remained above 50 afterwards.

From the above example, when the trend was bullish sometimes the RSI would turn downwards but it would not go below 50, this shows that these temporary moves are just retracements because during all these time the price trend was generally upward. As long as RSI technical indicator does not move to below 50 the ruling trend remains intact. This is the reason the 50 center-line mark is used to demarcate the signal between bullish & bearish signals.

The RSI indicator uses 14 day period as the default period, this is the period recommended by J Welles Wilders when he introduced the indicator. Other common periods used by traders are the 9 & 25 day moving average.

The RSI technical indicator period used depends on the chart timeframe you're using to trade, if you are using day trading chart time-frame the 14 period will represent 14 days, while if you use 1 hour chart time-frame the 14 period will represent 14 hours. For our illustration we shall use 14 day moving average, but for your trading you as a stock indices trader can substitute the day period with the trading chart time-frame you're Stock Index trading with.

To Calculate RSI Indicator:

  • The No. of days that a Index market is up is compared & analyzed to the number of days that the market is down in a given period of time.
  • The numerator in the basic formula is an average of all the trading sessions that finished with an upward price change.
  • The denominator is an average of all the down Index sessions closes for that period.
  • The average for the downward days is calculated as absolute numbers.
  • The Initial RSI is then turned into an oscillator.


Sometimes very big upward or downward movement in price in a single session price period may & might skew the calculation of the RSI average and produce a false signal - fake-out signal - in the form of a spike.

RSI Center-line: The center line for this Index technical indicator is 50. A value above 50 signals that the market trend is in a bullish phase as the average gains are greater than the average losses. Indicator Values below 50 indicate a bearish phase in the & signals that prices are generally closing lower than where they opened.

Overbought & Oversold Levels: Wilder set the RSI overbought & oversold levels at which the market moves are over-extended at 70 & 30.

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