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Using the RSI Filter.
http://www.financial-spread-betting.com/strategies/day-traders.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! In this lesson, we are continuing looking at using filters on the price chart in order to avoid trades that may not be optimal. Again, these are filters to prevent, or at least advise, us not to enter trades when the conditions are not so favourable. They do not necessarily tell us when the trade is a good idea, simply when it’s not a good idea. If you use filters in this way, it can help to reduce the number of bad trades that you make, and increasing the percentage of winning trades will result in more profit.
This time we look at using the RSI indicator as a filter. This is the Relative Strength Index which gives some indication of the strength of a financial security relative to itself. It’s in the family of indicators that are called oscillators and usually mapped out below the price chart with a range that goes from 0 to 100%. Other oscillators such as the stochastic could be used instead.
The idea of an oscillator is that its value usually goes between 30% and 70%, or sometimes 25% to 75%, and when it goes outside these bounds it indicates that the stock is overbought or oversold. Having said that, in a trend you may find that the oscillator stays outside these bounds while the trend continues, so in itself being outside the normal range is not a reason to enter a long or short trade.
But the way we are using the oscillator this time is as a filter, and that is to make us hesitate before going into a trade where the elements are not all aligned. It’s to keep from getting involved in a chart where everything isn’t in our favour. So regardless of how much we may think we want to take a long trade, if the oscillator is above say 70% it would not be a good time to do so.
Similarly, although we wouldn’t necessarily use the RSI as a trigger for a trade to happen, we can take a low value of RSI as allowing us to place a trade. If the trend is a strong uptrend, it’s unlikely that the value will come down as far as 25%, but we can at least look for the value to be down to say 45% before we contemplate taking a long trade. Depending on our trading plan, if it goes lower on a retracement in what is otherwise a strong uptrend we may decide we definitely want to become involved.
Using a filter to decide when not to trade will almost inevitably mean that you are making fewer trades. Some of those trades you may look back on as missed opportunities, particularly if they work out as you thought they might. But what we want to concentrate on is increasing the probability of good trades, and that means eliminating suspect trades, those that may tend to work out less often than others. By using the various filters explained here, you should keep down the number of bad trades that you suffer.
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