Using RSI Indicator for Daily Trading…
One of the very first indicators I started using in my personal trading was RSI — Relative Strength Index. Usually the default setting that everyone like to stick with is RSI setting of 14 periods, but that can provide less number of signals in a day. Few traders solve that problem by lowering the RSI period setting. Increasing that sensitivity gives unreliable and frequent signals. Therefore to solve that problem it would be nice if we can spot the ones that are high quality.
Define High Quality? When you can combine multiple studies, indicators and zones that tell you the same story — that is a good quality trade setup. As long as risk/reward is tilted towards your favor — that is what we want.
Long Day Trade:
- 14 Period RSI is below 30, (oversold)
- Stock price is at a support zone (does not necessarily have to be a single price point)
- Wait for a bullish bar to complete, and enter right above it
Below is an example of $QQQ chart in 15 minute time frame. The trading levels and commentary is on the chart.
Short Day Trade:
- 14 Period RSI is above 70, (overbought)
- Stock price is at a resistance zone (does not necessarily have to be a single price point)
- Wait for a bearish bar to complete, and enter right below it
Example below is from a $FB stock chart with 14 day RSI indicator applied.
You can look for such setups in any chart time frame. But if you enter a trade in based on a particular chart time frame, make sure your set up remains valid in that time frame. Usually traders move UP the time frame to justify and validate their setup. That is a recipe for loss.
As you enter such trades, take into account the Support and Resistance zones. See if volume is supportive of those zones. This is relatively a simple trading strategy, so eye balling the chart can help with seeing how RSI acted in the past when those levels were reached.