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RSI Indicator Trading Strategy Part 2
http://www.financial-spread-betting.com/course/relative-strength-index.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! Practical Ways to Use the RSI in Stock Trading. In the last video, we pointed out that it wasn’t always good to sell just because the RSI reaches an overbought level. If the price is in an uptrend, then it may just keep going up even though the RSI is over 70% and if you decided to go short you could lose your shirt. So in general we recommend that you don’t trade on the RSI when the price is trending.
But there is an exception to this, if you choose to use it, illustrated in this video. As always, it is a matter of personal choice how you want to trade, and everything given here is just a suggestion, pointing out how prices have reacted in the past. It is up to you what sort of trades you are comfortable taking in the hope of making money.
This particular idea suggests that you follow the RSI up into the overbought level on a stock trending up, but don’t take any trades yet. It’s very rare for a trend to continue without a periodic retracement, which is the price coming back down for a short period before the trend reasserts itself.
In this case, we are waiting for the retracement and watching the RSI coming back off the overbought (70%) level. Provided there is no underlying reason why the trend should fail, it’s reasonable to expect that after dropping a little, the price will go back up again even higher than its previous peak.
What you look for here is if the RSI drops as far as the oversold level, usually taken at 30%, while the retracement is happening. If so, we do not expect the oversold state to last for long, given the underlying trend, so it’s a good opportunity to go long in the stock. Effectively, we are choosing a price pattern where we can be fairly confident that the RSI will not remain at the extreme level for long.
You can apply exactly the same logic to a downtrend, this time looking for an opportunity to go short. In the downtrend, the RSI may well stay below 30% for a while, and this doesn’t give us a good trading opportunity. But if there’s a retracement upwards the RSI will increase. Our trading signal is when the RSI goes into the overbought level of 70% plus, when we expect that the price will reverse and continue downward again, giving us a shorting opportunity.
There are many different ways to trade on the RSI and other indicators. When you do so, you need to be clear on the reasons why you are doing it, rather than following some formula that you have read or heard. And you should always take into account the risks and rewards that you expect to find with a particular trade, and ensure that they fit in with your particular emotional pattern and trading plan. No one trades exactly the same as anyone else, and it will take a little time to decide what type of trades you are most happy making.
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