Monday July 16, 2007

RSI (Relative Strength Index)

When we use RSI, we use it to compare upward movement in closing price to downward movements over a certain period of time.

The original RSI charting technique used a 14 day period, but 7 & 9 days are more commonly used today to trade a short cycle & 21 to 25 for intermediate cycles.

RSI is a lot smoother than momentum or rate of change oscillators & is not as vulnerable to distortion from unexpected high or low prices during the opening of the market. We use different RSI signals in trending or ranging markets, overbought & over sold levels being the most important.

Chart courtesy of StockCharts.com

In a Ranging market we should trade as follows:

During a ranging market set the overbought level to 70 & the oversold to 30.

If the RSI Level falls below 30 & then rises above it, we go long

If the RSI Level rises above 70 & falls back below it, we go short

In a Trending market we should trade as follows:

In an up trend, go long, when the RSI falls below 40 & rises back above it.

In a down trend, go short when the RSI rises above 60 & falls back below it.

During a trending market we should only trade signals in the direction of the trend

Remember the RSI indicator is not strong enough to predict market moves on its own. Use other indicators such as the Slow stochastic in conjunction with it to get the maximum benefit.

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