RSI Trading Strategy - Simple Strategy (Updated 2021) (2024)

The RSI Indicator is one of the best technical indicators for traders. We have developed the 80-20 Trading Strategy that uses the RSI indicator. It involves price action analysis, which will help you land great trade entries! This RSI trading strategy is as useful as the RSI 2 trading strategy, which was developed by Larry Connor. However, this strategy strictly trades reversals that occur in the last 50 candles.

Read the entire article for all of the RSI trading rules and trading tips. Understanding the rules of these trading strategies will help you trade this strategy for the highest level of success. We also have training for the best Gann Fan Trading Strategy. Below, we will discuss the most important things you need to know about trading with the Relative Strength Index (RSI) indicator.

RSI Trading Basics

Using the Relative Strength Index, you can identify whether a price trend is overbought or oversold. The 80-20 RSI Trading Strategy is used as an RSI stock strategy, RSI forex strategy, and an RSI options strategy. We will discuss many things in this article, including RSI vs. stochastic indicator and why both indicators are excellent to trade with. We will also review the stochastic RSI oscillator trading systems, stochastic RSI setting, five day RSI strategy, Connors RSI strategy, momentum oscillator systems, and binary options strategy that work with the RSI indicator.

Is RSI a Trend Indicator?

RSI is one of the most used trend indicators you will find online. The RSI is a key component of many trend trading strategies. No one else shares how to trade it with step by step instructions. You will only find detailed instructions here. This can also be used with your forex trading strategiesif it is your market of choice.

RSI stands for the relative strength index. This will show you an overbought signal. This will also show you when the price is in oversold territory. I recommend using this indicator for the RSI overbought position because it increases your win rate. Before you start trading with our entry signal, we will cover a few key tips to help improve your trade. Also, read our winning news trading strategy, for more information.

First, remember this should incorporate the daily charts to find the best opportunities. Our Strategy should be used with multiple time frames to dial in your entries and make them more accurate. Second, it is essential to use the RSI signal. You will find the price breaking critical levels for the best possible entries.

How To Use RSI When Trading

If you combine this indicator with pivot points and a good candlestick pattern, you will hit trading home runs regularly.

You will be shown many images in this article to learn how to sell signals or buy signals. You will use the RSI line, also known as the RSI level, to maximize your effectiveness using this trading method. This article also serves as a beginners guide for everything related to the relative strength index RSI. We took a lot of time to create this content with details and examples to help you become better traders.

We developed an indicator that uses this strategy and provides you with simple entries and exit points. This strategy identifies a break of a trend and takes advantage of the movement in the opposite direction. (Kind of like our Trend Breaker Strategy).

In this article, we will review a simple trading strategy using the RSI indicator. You are going to benefit from this strategy by learning to trade divergence. Find a low-risk way to sell near the top or buy near the bottom of a trend.

But, before that, let’s see how to trade RSI if you’re a swing trader and a day trader.

See below:

RSI Strategy for Swing Trading

Swing traders attempt to capture medium-term changes in the trend over a period of a few days. And, the RSI indicator is a great additional tool to help us gauge the constant ebb and flow of the price action.

For swing trading, the most commonly used trading method is the RSI overbought/oversold strategy.

But, here is the issue with this approach:

Everyone is using it!

When everyone uses the same trading strategies, they eventually stop working overtime.

Now you might be wondering:

“How to use RSI in swing trading?”

The RSI trendline method is the most effective way to capture swing trades.

However, before we get into that, we need to make sure the RSI indicator is in tune with the medium-term swing trends.

Without correct settings, even the best trading ideas can end up in disaster.

Now, you might be wondering:

“What are the best RSI settings for swing trading?”

The best setting for swing trading is 20 periods. The RSI 20 periods encompass a full month of price action activity, which is just enough to be in tune with the medium-term trends.

Now…

The RSI swing trading strategy revolves around trading RSI trendline breakouts. The break of the RSI trendline will be used as a buy and sell signal as follows:

1. For sell signals draw a rising trendline on the RSI oscillator by connecting two or more bottoms
2. For buy signals draw a falling trendline on the RSI oscillator by connecting two or more tops

Here’s what I mean:

Usually, the RSI trendline breakout precedes the price, because momentum precedes price.

By this, you’ll ensure you’re one step ahead of the retail crowd with your entries.

Now…

Let’s not forget about day traders.

How are day traders going to use the RSI trading strategy?

See below:

RSI Trading Strategy Intraday

For intraday signals, we need to make the RSI indicator more sensitive to the short-term price action.

This means that the best RSI setting for day trading is 9 periods.

Why RSI 9 periods?

It’s not just because it’s more sensitive to the changes in the price, but it also ensures it encompasses enough price data so that it’s relevant. Otherwise, you might end up with a fast-paced RSI that is not that reliable.

Now, if you’re a high-frequency trader you can use a short-term period if the RSI is applied on the 5-minute chart or even the 1 minute time frame.

The RSI settings for 1 minute chart that we prefer are 4 periods.

Next, we’ll teach you a very unique way to use the RSI indicator to improve your day trading game.

Here is what you need to do:

Plot the 4 periods RSI over the 9 periods RSI on the same window and watch for buy and sell crossover signals.

You probably never heard you can overlay two RSI oscillators with different periods on the same window. But, this is possible with most trading platforms including TradingView and MetaTrader 4.

The RSI trading strategy intraday is straightforward:

1. When the short period RSI (RSI 4) is crossing above the long period RSI (RSI 9), it’s a buy signal if the crossover occurs below the 30 level
2. When the short period RSI (RSI 4) is crossing below the long period RSI (RSI 9), it’s a sell signal if the crossover occurs above the 70 level

See the example below:

Now…

Let’s not forget about cryptocurrency traders. They also deserve some nuggets. Although crypto traders can easily use the above RSI trading strategies, we have something that is adjusted to the volatility of the cryptocurrency market.

See below:

RSI Trading Strategy Crypto

The RSI trading strategy is effective for cryptocurrencies as well.

We come up with a trading strategy that focuses exclusively on the cryptocurrency market.

If you want to learn more about it, make sure you click here: Amazing 2-Period RSI Day Trading System.

What is RSI?

RSI Trading Indicator Used for Strategy

The RSI indicator is one of the most popular indicators used by traders in any market, such as stocks, foreign exchange (forex), futures, options, and more. What is the RSI (Relative Strength Indicator)? This indicator was developed by Welles Wilder around 1978. It quickly became one of the most popular oscillator indicators for traders in financial markets.

This momentum indicator can fluctuate between 0 and 100 providing overbought and oversold signals.

The formula for this indicator is a bit complex:

I could explain this whole process to you. However, I will spare you the details. I want to share this with the mathematicians that are reading this and enjoy equations. You can do a quick google search if you would like to learn more.

Forex Trading Indicator Settings

The default settings for this indicator is a smoothing period of 14. We are going to change that setting to 8. Make sure you turn this setting before you jump into this strategy. The reason I prefer eight instead of 14 is because the RSI will be much more responsive. This is critical when we are looking for overbought or oversold conditions and readings. Also, go into the RSI setting and change the lines in the indicator to 80, 20. You will learn more about this later.

How to Trade with the RSI Trading Indicator

This indicator will be the only indicator we use for this strategy. This is because we have a strict set of rules to follow before entering a trade. And these rules will, without a doubt, validate a reversal for us to open a trade. Below is another strategy on how to apply technical analysis step by step. Before you use this strategy, make the following changes to the RSI indicator:

Adjustments:

• 14 period, to 8.
• 70 and 30 lines, to 80 and 20.
• This indicator comes standard on most trading platforms. You’ll just need to make the adjustments above.

RSI Trading Strategy

Step One: Find the currency pair that is showing a high, the last 50 candlesticks. (OR low depending on the trade)

The 80-20 Trading strategy can be used for any period. This is because there are reversals of trends in every period. This can be a swing trade, day trade, or a scalping trade. As long as it follows the rules, it is a valid trade. We also have training for Forex Basket Trading Strategy. In this step, we only need to ensure it is the low or the high of the last 50 candles.

Below is an example:

Note** We will use this same example to explain this strategy. This is a USDCHF currency pair and will be a BUY trade.

Once we determine this low or high, then we can move on to the next step. I drew vertical lines on the price chart so you can see the 50 candle low that we identified. If you need to use horizontal lines on your chart to verify that the candle has closed the lowest of the last 50, you can do so. This is not necessary but may be helpful for you to do and see how strong the trend is.

Step Two Using the RSI Trading Indicator:

When we find a 50 candle low, it needs to be coupled with RSI reading of 20 or lower. (If it’s high it needs to be combined with the RSI reading 80 or higher.). Below we have a reading that hit the 20 line on the RSI and was the low of the last 50 candles.

Once we see that we had a low, the last 50 candles, and the RSI is BELOW 20, we can move to the next step. Remember that this strategy is a reversal strategy. It is going to break the current trend and move the other direction.

Step Three: Wait for a second price (low candle) to close after the first one that we already identified.

The second price low must be below the first low. Although, the RSI Trading indicator must provide a higher signal than the first. Remember that divergence can be seen by comparing price action and the movement of an indicator. If the price is making higher highs, the oscillator should also be making higher highs. If the price is making lower lows, the oscillator should also be making lower lows. If they are not, that means price and the oscillator are diverging from each other. This is why it’s called “divergence.”

Just because you see a bullish or bearish divergence, doesn’t mean you should automatically jump in with a position. We have rules in place that will capitalize on this divergence so that we can make a significant profit. Keep in mind that this step may take time to develop. It is very important to wait for this second low because it gets you in a better trade making position.

This sounds a bit complex, but think of it like this:

Price goes down/RSI goes up. That is the Divergence. Remember that our example is a current downtrend looking to break to the upside. If this was a 50 candle high, we would be looking at the exact opposite of this step. With that said, let’s take a look at our chart.

Once this criterion has been met, we can go ahead and look for entry. This is because the charts are showing us that a reversal is coming soon.

Step Four: How to Enter the Trade with the RSI Trading Strategy.

The way you enter a trade is very simple. You wait for the price to head in the direction of the trade and wait for a candle to close above the first candle that you identified that was previously 50 candle low.

If you are struggling with this step, save the picture for reference. This will help guide you when looking for a trade.

Step five: Once you make your entry, place a stop loss.

To place your stop, bump back 1 to 3 time periods and find a reasonable, logical level to put your stop. You are looking for prior resistance, support.

We placed our stop below this support area. That way if the trend continued and did not break, it could hit this level and bounce back up in our direction.
I recommend you follow at least a 1 to 3 profit vs. risk level. This will ensure that you are maximizing your potential to get the most out of the strategy.

You can adjust as you wish. Keep in mind that most successful strategies that identify breaks of a trend use a 1 to 3 profit vs. risk level. Here you can learn how to profit from trading.

To recap, here are the rules of the strategy:

If you have questions or comments about this trading strategy you may reach us at info@tradingstrategyguides.com. If you would like to see another great strategy go ahead and check out the Parabolic SAR + Moving Average Strategy.The RSI Trading Strategy is great and is fairly simple to learn. However, counting 50 candles is a bit monotonous. This is one of the many reasons we have developed the EFC indicator that trades this strategy for you!

Check out the EFC Indicator we developed that trades the RSI 80-20 strategy for you!

Tap on the Image to Learn more!

The indicator is available exclusively for the Meta Trader 4 and 5 platform.

If you would like to see a complete guide to the EFC indicator we wrote an article about it here!

Thank you for reading!

We also recommend taking some time to learn about our mean reversion trading strategy.

-Trading Strategy Guides