Trade Stock Indices

RSI Trade Strategy

Relative Strength Indicator Strategy

RSI or RSI is one of the most popular/liked stock indicator used in indices. It is an oscillator stock indicator which oscillates between 0 -100. This a market trend following trading indicator. It shows the strength of the market trend, values/readings above 50 indicate a bullish trend while values/readings below 50 indicate bearish market trend.

RSI Indicator Estimates Momentum of a Trend.

The center-line for the RSI is 50 stock indicator, cross-over of the center-line indicate shifts from bullish to bearish trend & vice versa.

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

Below 50, the sellers have greater momentum than the buyers & stock trading price on the chart will keep going downwards as long as RSI indicator stays below 50.

RSI Indicator - RSI Index Trading Strategy: 50 Center-line Cross-over Method

RSI Indicator - How to Trade with RSI Indicator

In the trading example illustration shown above, when the trading indicator is below 50, the trading price kept moving in a downward stock trend. The trading price continues to move down as long as RSI indicator was below 50. When the RSI indicator moved above 50 it showed that the energy had changed from sell to buy and that the downward trend had ended.

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

From the trading example illustration shown above, when the market trend was bullish sometimes the RSI would turn downward 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 moves upwards. As long as RSI indicator does not move to below 50 the current trend remains intact. This is the reason the 50 center line mark is used to demarcate the signal between bullish and bearish stock signals.

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

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

To Calculate RSI:

  • The number of days that a stock market is up is compared to the number of days that the trading market is down in a given time period.
  • The numerator in the basic formula is an average of all the trading sessions that finished with an upward stock trading price change.
  • The denominator is an average of all the down trading market sessions closes for that period.
  • The average for the down days is calculated as absolute numbers.
  • The Initial RSI indicator is then turned in to an oscillator.

Sometimes very large up or down movement in trading price in a single indices trading session trading price period may skew the calculation of the RSI average and produce a false signal - whipsaw signal - in the form of a spike.

RSI Centerline: The center-line for this trading indicator is 50. A value above 50 implies that the trend is in a bullish phase as average gains are greater and higher than the average losses. Values below 50 indicate a bearish phase in the trading market prices are in general closing lower than where it's that they opened.

Overbought and Oversold Levels: Wilder set the RSI overbought and oversold levels at which the trading market moves are overextended at 70 and 30.

Study More Tutorials and Courses:

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