Rsi stock trading strategies

3 Trading Tips for RSI.

by Walker England.

In a Downtrend, RSI Can Remain Oversold Use the Centerline to Determine Market Direction Settings Can be Adjusted for More or Less Oscillation.

RSI ( Relative Strength Index ) is counted among trading’s most popular indicators. This is for good reason, because as a member of the oscillator family, RSI can help us determine the trend, time entries, and more. Today to help become better acquainted with the indicator, we will review three uncommon tips for trading with RSI.

Let’s get started!

(Created using FXCM’s Marketscope 2.0 charts)

Think Beyond the Crossovers.

When traders first learn about RSI and other oscillators, they tend to gravitate to overbought and oversold values. While these are intuitive points to enter in the market on retracements, this can be counterproductive in strong trending environments. RSI is considered a momentum oscillator, and this means extended trends can keep RSI overbought or oversold for long periods of time.

Above we can see a prime example using RSI on a GBPUSD 8Hour chart. Even though RSI dropped below a reading of 30, on July 27 th , price continued to decline as much as 402 pips through today’s trading. This could have spelled trouble for traders looking to buy on a RSI crossover from overbought values. Instead consider the alternative and look to sell the market when RSI is oversold in a downtrend, and buying when RSI is overbought in an uptrend.

Learn Forex – GBPUSD 8Hour.

(Created using FXCM’s Marketscope 2.0 charts)

Watch the Center Line.

All oscillators have a center line and more often than not, they become a forgotten backdrop compared to the indicator itself. RSI is no different with a center line found in the middle of the range at a reading of 50. Technical traders use the centerline to show shifts in the trend. If RSI is above 50, momentum is considered up and traders can look for opportunities to buy the market. A drop below 50 would indicate the development of a new bearish market trend.

In the graph above we can again see our GBPUSD example using an 8HR chart. Notice how when price pushed upward, RSI remained above 50. Even at times, the center line acted as indicator support as RSI failed to break below this value on June 24 th prior to the creation of a higher high. However, as momentum shifted, RSI dropped below 50 indicating a bearish reversal. Knowing this, traders could conclude any existing long positions, or look for order entries with prices new direction.

Check Your Parameters.

RSI like many other oscillators is defaulted to a 14 period setting. This means the indicator looks back 14 bars on whatever graph you may be viewing, to create its reading. Even though 14 is the defaulted setting that may not make it the best setting for your trading. Normally short term traders use a smaller period, such as a 7 period RSI, to create more indicator oscillator. While longer term traders may opt for a higher period, such as a 25 period RSI) for a mother indicator line.

In our final comparison, you can see a 9 period RSI line side by side with a 25 period RSI line. While there may not seem like much difference at first glance, pay close attention to the centerline along with crossovers of the 70 and 30 values. The RSI 9 at the top of the graph has considerably more oscillation compared to its RSI 25 counterpart.

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---Written by Walker England, Trading Instructor.

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How do I use the Relative Strength Index (RSI) to create a forex trading strategy?

The relative strength index (RSI) is most commonly used to indicate temporary overbought or oversold conditions in a market. An intraday forex trading strategy can be devised to take advantage of indications from the RSI that a market is overextended and therefore likely to retrace.

The RSI is a widely used technical indicator, an oscillator that indicates a market is overbought when the RSI value is over 70 and indicates oversold conditions when RSI readings are under 30. Some traders and analysts prefer to use the more extreme readings of 80 and 20. A weakness of the RSI is that sudden, sharp price movements can cause it to spike repeatedly up or down, and, thus, it is prone to giving false signals. Also, it is not uncommon for price to continue to extend well beyond the point where the RSI first indicates the market as being overbought or oversold. For this reason, a trading strategy using the RSI works best when supplemented with other technical indicators.

The following is an intraday forex trading strategy that employs the RSI and at least one additional confirming indicator:

• Monitor the RSI for readings indicating the market is overbought or oversold.

• Consult other momentum or trend indicators for confirming signs of an impending retracement. For example, if the RSI shows oversold readings, a retracement to the upside is anticipated.

• Only initiate a trade looking to profit from a retracement if one these additional conditions is met:

1. The moving average convergence divergence (MACD) has shown divergence from price (for example, if price has made a new low, but the MACD has not and has turned from a downslope to an upslope), or.

2. The average directional index (ADX) has turned in the direction of a possible retracement.

• If the above conditions are met, then initiate the trade with a stop-loss order just beyond the recent low or high price, depending on whether the trade is a buy trade or sell trade, respectively.

• The initial profit target can be the nearest identified support/resistance level.

RSI Trading Strategy Game.

Backtest a simple RSI trading strategy with this web-connected spreadsheet – play a fantasy stock trading game!

The spreadsheet downloads historic prices for your chosen ticker, and some VBA triggers buy or sell points when the relative strength index (RSI) rises above or falls below user-defined values.

Get it from the link at the bottom of this article.

The trading logic is not sophisticated or complex (it’s described in greater detail below).

But you can use similar principles to develop and backtest enhanced strategies. For example, you could code a scheme that uses several indicators (such as ATR or the stochastic oscillator) to confirm trends before triggering buy/sell points.

Before you ask, let me make a few things clear about the spreadsheet.

it’s not a realistic trading strategy no transaction costs or other factors are included the VBA demonstrates how you might code a simple backtesting algorithm – feel free to enhance it, tear it apart or just plain geek out.

But most importantly, it’s a game – change parameters, try new stock and have fun! For example, the spreadsheet calculates the compound annual growth rate of your investment pot; try to get this number as high as possible.

The spreadsheet lets you define.

a stock ticker, a start date, and an end date an RSI window the value of RSI above which you want to sell a fraction of your stock the value of RSI below which you want to sell a fraction of your stock the fraction of shares to buy or sell at each trade the amount of money you have on day 0 the number of shares to buy on day 0.

After you click a button, some VBA starts ticking away behind the scenes and.

downloads historical stock prices between the start date and end date from Yahoo calculates the RSI for each day between the start and end date (removing, of course, the initial RSI window) on Day 0 (that’s the day before you start trading) buys a number of shares with your pot of cash from Day 1 onwards, sells a defined fraction of shares if RSI rises above a pre-defined value, or buys a fraction of shares if RSI falls below a pre-defined value calculates the compound annual growth rate, taking into account the value of the original pot of cash, the final value of cash and shares, and the number of days spent trading.

Bear in mind that if RSI triggers a sell, the logic has to trigger a buy before a sell can be triggered again (and vice-versa). That is, you can’t have two sell triggers or two buy triggers in a row.

You also get a plot of the close price, RSI and the buy/sell points.

You also get a plot of your total fantasy wealth grows over time.

The buy/sell points are calculated with the following VBA – following the logic is easy.

View the rest of the VBA in Excel (there’s lots there to learn from)

If you’re suitably caffeinated, you could enhance the VBA to employ other indicators to confirm trading points; for example, you could trigger selling points only if RSI rises above 70 and MACD falls below its signal line.

8 thoughts on “ RSI Trading Strategy Game ”

This calculator implies that the closer you set the buy/sell indicators to 50, the higher the final wealth. This can be exemplified by entering the following parameters. Is it possible that this is incorect?

Stock Ticker VTI.

Start Date 16-Nov-09.

End Date 15-Nov-14.

Sell above RSI 50.1.

Buy below RSI 49.9.

% to Buy/Sell at Each Trade 40.

# Shares to Buy on Day 0 17.

Pot of Cash on Day 0 1000.

In Excel for Mac, the following statement in GetData produces a compile error:

For Each C In ThisWorkbook. Connections.

Does the VBA work on a Mac if you comment out those lines?

I’ve tested the spreadsheet on Excel 2010 and 2013 on Windows 8 and it’s fine.

I deleted out those lines and it seemed to run OK. Thanks.

RSI does not correct for splits.

Does this program work well on day trades too?

I will appreciate if someone will share their experience.

thanks samir this is really great stuff. How would you set up the macros so that you can backtest the strategy over a universe of stocks instead of just one?

This question doesn’t have a simple answer. You’d need to spend some time modifying the VBA.

RSI And How To Profit From It.

We all know there are no magic indicators but there is one that certainly acted like magic over the past 10 years or so. What indicator is it? Our reliable RSI. In this article we are going to look at two trading models that were first talked about in the book, “Short Term Trading Strategies That Work” by Larry Connors and Cesar Alvarez. It has been well established in various articles that a 2-period RSI on the daily chart of the stock index markets has been a fantastic tool for finding entry points. Sharp price drops in the S&P E-Mini futures during bullish markets have historically (since the year 2000) been followed by reversals. These reversals can often be detected by using the standard RSI indicator with a period value of two. Place this indicator on a daily chart and look for points when the indicator falls below five, for example. These extreme low points are buying opportunities.

Values below 5 are green. These are buy points.

RSI(2) System.

We can turn this into a simple trading model to test the effectiveness of the RSI(2) indicator on the E-mini S&P. In short, we wish to go long on the S&P when it experiences a pullback in a bull market. We can use a 200-day simple moving average to determine when we are in a bull trend and using a 2-period RSI to locate high probability entry points. We can then exit when price closes above a 5-day simple moving average. The rules are clear and simple:

Price must be above its 200-day moving average. Buy on close when cumulative RSI(2) is below 5. Exit when price closes above the 5-day moving average. Use a $1000 catastrophic stop loss.

The system backtest was performed from September 1997 through March 2012. A total of $50 for commissions and slippage was deducted per round trip. Below is a chart of what this system would look like along with the system results.

RSI(2) System Results.

Percent Winners: 67%

These results are great considering we have such a simple system. This demonstrates the power the RSI(2) indicator has had now for well over a decade. Just with this concept alone you can develop several trading systems. For now, let’s see if we can we improve upon these results.

Accumulated RSI(2) Strategy.

Larry Conners adds a slight twist to the RSI(2) trading model by creating an accumulated RSI value. Instead of a single calculation we will be computing a running daily total of the 2-period RSI. In this case, we are going to use the total of the 2-period RSI for the past three days. When you keep an accumulated value of the RSI(2) you smooth out the values. Below is a chart comparing the standard 2-period RSI indicator with an accumulated 2-period RSI indicator. You can see how much smoother our new indicator is. This is done to reduce the number of trades in hopes of capturing the quality trades. In short, it’s an attempt to improve the efficiency of our original trading model.

Accumulated RSI in top pane. Standard RSI in lower pane.

Price must be above its 200-day moving average. Buy on close when cumulative RSI(2) of the past three days is below 45. Exit when RSI(2) of the close of current day is above 65. Use a $1000 catastrophic stop loss.

Accumulated RSI(2) System Results.

Percent Winners: 67%

S&P Cash Market.

What would the 2-period RSI system look like trading 100 shares of the S&P cash market going back to 1993? It does rather well.

Conclusions.

So which one is better? The accumulated strategy worked as intended. It increased the efficiency of the standard RSI(2) trading model by reducing the number of trades, yet produced about the same amount of net profit. As a bonus, the drawdown was slightly smaller. While both systems do a fantastic job, the accumulation strategy may do a slightly better job. The Accumulated RSI(2) strategy will work well on the mini Dow as well as the two ETFs, DIA and SPY.

The EasyLanguage code is available below as a free download. There is also a TradeStation workspace. Please note, the trading concept and the code as provided is not a complete trading system. It is simply a demonstration of a robust entry method that can be used as a core of a trading system. So, for those of you who are interested in building your own trading systems this concept may be a great starting point.

Get The Book.

TradeStation RSI(2) WorkSpace.

2013 Update:

An additional article was published in 2013 which updates the RSI system and explores it in more detail. Read it here.

About the Author Jeff Swanson.

Jeff is the founder of System Trader Success – a website and mission to empowering the retail trader with the proper knowledge and tools to become a profitable trader the world of quantitative/automated trading.

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