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Monday, July 16, 2012

Trading Relative Strength Index

Last time I wrote a little about using macd in trading and today I want to talk about relative strength index tradin. I have written one post on the subject and in the article I want to share more ideas on the topic. The two above mentioned indicators, together with 200 simple moving average are my favorite technical indicators. Although I consider myself a trader who mostly follows price action, I still like to place a few indicators on my charts. They usually confirm what I see on the charts and sometimes even start giving me signals about coming reversals prior to all other technical, fundamental and price action techniques.  

The thing I would like to start is a very simple idea that might help you to be a successful trader. The idea is that even if you have a medium good trading system and you are able to discipline yourself by following signals of the system you will most often end up having some profit. Of course, you need to back test your system. However, you should remember in this business it is your personality and not your trading system that matters most. And discipline is one of the keys that will open you the gates to success. 

There are hundreds approaches how one can use rsi indicator and to tell the truth you can also create hundreds of your ways to use the indicator. You should however find the best filtering ways to select only the best ones and avoid those that have a high potential for false signals. You will surely notice that the indicator (values 14 or 21) can pick up tops and bottoms pretty well (bottoms when it is below 30 and tops when the indicator above 70). So, if you are a swing or trend trader have this in mind.  

Statistics also shows that your chances for a profitable trade using rsi increases if you don’t simply use overbought or oversold values, but try to wait for divergences on the indicator. Even if you have an indicator showing you that the market is overbought it is only stating the fact about condition of the market. You, however, do not know for sure how much will the market continue rising. So, you do not want to immediately jump into the market and start selling right after it goes above 70 level or buying when it goes below 30 level. 

You want to see more signs of the market slowing down and more signs of reversal. A divergence could be one of the best confirmations of that after you have seen overbought or oversold level reached. Then wait for some important levels to be broken and trade a market reversal. 

Hope this short post was useful. I will update the topic in my future article.

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Trading financial markets carries a high level of risk, and may not be suitable for all investors. All information on the blog is of educational nature and cannot be considered as advice, recommendation or signals to trade in any financial markets.