What is RSI Indicator? Relative Strength Index Explained

how to use rsi indicator for day trading

The main goal is to profit from swings in price movement over the course of several days or weeks. By adding a moving average on the Relative Strength Index chart window, I seek to take quality crossover signals. In order to smooth the signals offered by the Relative Strength Index indicator, I prefer to add a moving average to the indicator. Short positions were safe only after the price closed below the trend line – previous support became resistance.

Sometimes, the price doesn’t plummet or skyrocket right away but a while after passing price lines. We can avoid some of these gaps by adjusting the price line levels. Conversely, if the RSI shows a downtrend when the price chart is displaying a rise, it’s a bullish divergence. The average gain is the average of how much the price has increased from each of its low points within a time period. Conversely, the average loss is how much the price has gone down from each of its highs.

Adjusting For Volatility Levels

This overbought signal formed as the market rose into the resistance how to use rsi indicator for day trading zone. We shorted below the first bearish bar formed in the zone.

  • And as you know, pullbacks are usually short-lived, it doesn’t go down forever.
  • This is a signal that price may be heading towards a top and a downward reversal is about to happen.
  • The RSI is a workhorse for swing traders as it helps detect oversold and overbought conditions.
  • Looking at the formula, the first question is what is the average gain?
  • Effective day trading is not merely about quantity but rather about quality (taking the best high probability short-term trades).
  • And, the RSI indicator is a great additional tool to help us gauge the constant ebb and flow of the price action.

Learn this simple strategy that targets intraday reversals. The Relative Strength Indicator is a fairly reliable tool that can be used by both novice and advanced traders. For beginner traders, it is best to start using the tool in 14 periods and 70/30 thresholds, or 2 periods and 90/10 thresholds.

The truth about RSI indicator

When the Bollinger Bands are narrow as in this example, you should aim for the lower Bollinger Band, and not the middle one. However, a good scalping trading technique which includes the Relative Strength Index must use other indicators to determine the main trend. I prefer to filter a lot of market noise and invalid signals, by combining these 2 approaches to trade the Relative Strength Index, and merge them into one signal. I also prefer to further filter the signal with another technique, a trend line breakout, for a conservative entry.

Conversely, increasing the timeframe for RSI increases the amount of data that is factored into the calculation of the index. Because of this, the data becomes less sensitive and there are fewer signals for you to base your trade upon. The Relative Strength Index can be a powerful tool, especially for day traders. Of course, you can’t overly rely on it as the result is never guaranteed. A prediction is only an analysis of the past and has little to do with the future. If we observe price making new lower swing lows, but the RSI is printing new higher swing highs, then we see bullish divergence. If the RSI drops to 30 or lower, then it is an opportunity to cover a short position or open a long position.

Day Moving Average Trading Strategy – (With Backtest And Indicator)

In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend. The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Short or longer timeframes are used for alternately shorter or longer outlooks. High and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum. The tricky thing about divergences is that the reading on the RSI is set by price action for that respective swing. As you see, there were multiple times that BFR gave oversold signals using the relative strength indicator.

When the RSI is rising, an upward trendline is drawn by connecting two or more lows and projecting the line into the future. Similarly, when the RSI is falling, a downward trendline is drawn by connecting two or more highs and projecting the line into the future. A break of an RSI trendline precedes an actual price reversal or continuation in the market.