Now that we know the relative strength index formula, let's analyze how to use this powerful indicator. The RSI can provide you with the ability to gauge the primary direction of the trend.
15 min trading
A bit more than an hour after the morning open, we notice the relative strength index leaving an oversold condition, which is a clear buy signal. The next period, we see the MACD perform a bullish crossover — our second signal. Since we have two matching signals from the indicators, we go long with IBM. We appear to be in the beginning of a steady bullish trend. Five hours later, we see the RSI entering oversold territory just for a moment.
Since our strategy only needs one sell signal, we close the trade based on the RSI oversold reading.
In this trading strategy, we will match the RSI with the moving average cross indicator. For the moving averages, we will use the 4-period and period MAs. We will buy or sell the stock when we match an RSI overbought or oversold signal with a supportive crossover of the moving averages. We will hold the position until we get the opposite signal from one of the two indicators or a divergence on the chart. In addition, I want to clarify something about the MA cross exit signals.
A regular crossover from the moving average is not enough to exit a trade. I recommend waiting for a candle to close beyond both lines of the moving average cross before exiting the market. To illustrate this trading strategy, please have a look at the chart below:. RSI enters the oversold area with the bearish gap the morning of Aug Two hours later, the RSI line exits the oversold territory generating a buy signal. An hour and a half later, the MA has a bullish cross, giving us a second long signal.
Furthermore, this happens in the overbought area of the RSI. This is a very strong exit signal and we immediately close our long trade. This is a clear example how we can attain an extra signal from the RSI by using divergence as an exit signal. Now I will show you how to combine the relative strength index with the relative vigor index.
In this setup, I will enter the market only when I have matching signals from both indicators. I will hold the position until I get an opposite signal from one of the tools — pretty straightforward. First, we get an overbought signal from the RSI. Then the RSI line breaks to the downside, giving us the first short signal.
Two periods later, the RVI lines have a bearish cross. This is the second bearish signal we need and we short Facebook, at which point the stock begins to drop.
After a slight counter move, the RVI lines have a bullish cross, which is highlighted in the second red circle and we close our short position. This trade generated a profit of 77 cents per share for a little over 2 hours of work. Facebook then starts a new bearish move slightly after 2 pm on the 21 st.
Unfortunately, the two indicators are not saying the same thing, so we stay out of the market. Later the RSI enters oversold territory. A few periods later, the RSI generates a bullish signal. After two periods, the RVI lines also have a bullish cross, which is our second signal and we take a long position in Facebook.
Just an hour later, the price starts to trend upwards. Notice that during the price increase, the RVI lines attempt a bearish crossover, which is represented with the two blue dots. Fortunately, these attempts are unsuccessful, and we stay with our long trade.
Later the RVI finally has a bearish cross and we close our trade. Here I will use the RSI overbought and oversold signal in combination with any price action indication, such as: In order to enter a trade, I will need an RSI signal plus a price action signal — candle pattern, chart pattern or breakout. I will hold every trade until I get a contrary RSI signal, or price movement that the move is over.
The chart image starts with the RSI in overbought territory. After an uptrend, the BAC chart draws the famous three inside down candle pattern, which has a strong bearish potential. With the confirmation of the pattern, we see the RSI also breaking down through the overbought area.
We match two bearish signals and we short BAC. The price starts a slight increase afterwards. This puts us into a situation, where we wonder if we should close the trade or not. Fortunately, we spot a hanging man candle, which has a bearish context.
We hold our trade and the price drops again. Look at the three blue dots on the image. These simple dots are enough to build our downtrend line. After we entered the market on an RSI signal and a candle pattern, we now have an established bearish trend to follow! The trend resists the price yellow circle and we see another drop in our favor. After this decrease, BAC breaks the bearish trend, which gives us an exit signal.
We close our position with BAC and we collect our profit. This trade made us 20 cents per share. If you are new to trading, combining the RSI with another indicator like volume or moving averages is likely a great start. Pairing with the indicator will give you a set value to make decision and removes a lot of the gray areas associated with trading.
Once you progress in your trading career, you will want to look to methods using price action that are more subjective but being able to apply techniques specific to the security you are trading will increase your winning percentages over time. But again, this level of trading takes a ton of practice over an extended period of time. I think it's important to highlight where indicators can fail you as a trader and the RSI is no different.
The textbook picture of an oversold or overbought RSI reading will lead to a perfect turning point in the stock. This is what you will see on many sites and even earlier in this very post. As you see, there were multiple times that BFR gave oversold signals using the relative strength indicator.
Yet, the stock continued higher for over three hours. Simple, you have to include a stop loss in your trade. Get ready, because this will be a common theme as we continue to dissect how the RSI can fail you.
The tricky thing about divergences is that the reading on the RSI is set by price action for that respective swing. To this point, look at the above chart and notice how after the divergence takes place the stock pulls back to the original breakout point.
But then something happens, the stock begins to grind higher in a more methodical fashion. If you are long the market, it doesn't mean you should panic and sell if the high is broken with a lower RSI reading. What it means is that you should take a breath and observe how the stock behaves. If the stock beings to demonstrate trouble at the divergence zone, look to tighten your stop or close the position. However, if the stock blasts through a prior resistance level with a weaker RSI reading, who are you to stop the party?
In some RSI examples, you will see these neat scenarios where the indicator bounces from below 30 to back above Well all you have to do is buy the low reading and sell the high reading and watch your account balance increase - wrong! The 15 minute chart is used as a trade alert and the 1 minute chart is used as a timing chart to place a binary options contract. This short term binary options expiry strategy is simple and robust as it combines two different times one for signals and the other for timing.
However the success of this strategy comes down to the speed of execution. If the Stochastics and RSI break the lower threshold upwards on the 15 minute charts, indicating a CALL signal, what if these are already well within the boundaries on the 1 minute charts? Would you still place the CALL for 15 minutes from the first indicators, given the second are already satisfied?
This looks good, Can you just add 2 graphs to the same 1 minute timeframe and multiply the 15 min settings by 15, this would stop changing over between 2 graphs. In your call example the So how can a trade be triggered from the M1 chart at Am I missing something? You use the 15 min bar that closed at Then switch to 1 min. Hope it makes sense. I think there is a mistake on the explanation for PUT option.