Redefine RSI Trading Strategies – Discover and redefine the secrets of the Relative Strength Index (RSI) and elevate your trading skills! Confused with so many versions of RSI? Redefine how to use RSI to make profitable trades.
If you’ve recently dipped your toes into the exciting world of stock trading, you might have heard of the Relative Strength Index (RSI), one of the most important and beautiful technical indicators. Many traders and investors are only focusing on RSI trading strategies and gaining the most. But what is RSI, and how can beginners like you leverage it for successful trading? Let us dive into RSI trading strategies for beginners with real-time case studies.
Relative Strength Index explained in simple terms
Price is the king in the stock market. If one can predict the stock price movement, he may be the king of the market. However, it is not so easy to predict the stock price. Few technical indicators can help you to evaluate the price movement. One of those technical indicators are Relative Strength Index (RSI).
The Relative Strength Index is a momentum oscillator that measures the speed and change of price movements. In simpler terms, it helps you understand if a stock is overbought (too expensive) or oversold (a bargain).
Traditionally, an RSI value above 70 typically indicates that a stock is overbought, and a pullback may be on the horizon. Conversely, an RSI value below 30 signals that a stock is oversold, suggesting it might be a good time to buy.
Redefining RSI Trading Strategies for Beginners
1. Step-by-step guide to using RSI for trading
Relative Strength Index (RSI) compares the strength of itself during its up days versus down days to determine how well a stock performs relative to itself. RSI shows the strength of the stock price. The RSI ranges from 0 to 100. A reading of 60 or higher is considered bullish, while a reading of 40 or lower is considered bearish. I usually invest when the RSI is above 40. There is no upper level of RSI for me as a momentum investor.
Traditionally, an overbought situation comes when the RSI is above 70. However, I believe if the RSI is above 70, it’s often a sign that a stock is in a bullish trend. If you have invested in that stock keep investing and keep an eye on it till RSI again comes back to 40 level.
Similarly, when a stock RSI is below 40, I consider this as in bearish trend. I will avoid those stocks until they come back and sustain over 40 levels to consider it as a buy. All the above discussions are related to momentum investing. This is not professional financial advice. Consulting a financial advisor about your particular circumstances is best before investing.
What I considered in my investing journey while dealing with RSI as a technical indicator. Step-by-step guide to using RSI for trading.
- RSI (14) > 60 is a bullish signal, keep investing in the stock and keep an eye on it.
- RSI (14) is in a range of 40-60, the stock may be sideways but is in a bullish trend and is consolidating at the moment. Look for opportunities if the volumes are increasing with price.
- RSI (14) is in the range of 60-80 the stock is in a strong bullish trend
- RSI (14) < 40 the stock is on a downtrend
- RSI (14) is in the range of 40-20, the stock is in a strong downtrend.
- In a market uptrend, if RSI (14) is near 40 from the top and bounces back with strong volume and green candles, then the stock is still in an uptrend.
- In a downtrend, if RSI (14) is heating 40 from down and bouncing back down, then the stock is in a bearish trend.
However, along with the RSI value, you must consider broader market trends.
A case study of BSE Limited stock price – RSI is above 80 for a long period but the stock price is moving up.
2. RSI Divergence Strategy
RSI Divergence occurs when the RSI and the stock price move in opposite directions. If the stock price is making new highs while the RSI is making new lows, it can signal a potential reversal. However, each time RSI divergence does work as expected.
In a market uptrend, despite an RSI divergence showing a downfall of the stock price, the Stock takes a sideway and resumes its upward journey. Similarly, in a market downtrend, RSI divergence and Stock price might behave differently. Hence, the RSI divergence must be accompanied by other indicators such as MACD and Moving averages before taking a final call on stock investment.
3. RSI and Moving Averages: The Cross-Verification Strategy
Relative Strength Index combined with moving averages is a deadly combination of technical indicators. For example, if the stock price is above 50-day and 200-day SMAs and the RSI crosses above the 40 level, it can be a strong buy signal. Along with the above parameters, if trading volume is strong and above the 100-day moving average, it gives a strong bullish signal to buy.
4. RSI Trend Confirmation Strategy
Use RSI to confirm existing trends. When RSI stays above 50 during an uptrend or below 50 in a downtrend, it indicates the trend’s strength.
Free RSI Scanner Tools in 2024
There are many scanner tools free and paid to get your job done. You do not have to search the stocks manually that pass through the above RSI condition. Define the rule on the platform and rest assured, the tool will do the job for you. We will share a few free tools that can help you find stocks with bullish relative strength index (RSI). Below are two Top RSI Scanner Tools in 2024 that will help you scan the stocks based on your defined rules.
Chartlink is one of the best free tools that gives you the right stocks once you define the rules. I am here to share the rules for RSI Trading Strategies. You can redefine the rule yourself.
Let me explain what I did here. With all-cash stocks taken, I put the stock price trading above the 50-day and 200-day simple moving average as well as the exponential moving average. This represents both long-term and short-term trends of the stock.
The market cap of the company must be above Rs 500 crore to avoid any penny stocks.
The most important part of the below rule is RSI (14). I have considered RSI (14) daily, monthly, and weekly. Both monthly and weekly RSI should be above 60 while daily RSI must be above 40, the higher is better. It is important to see monthly and weekly RSI to understand the trend.
I am here taking all cash stocks that are traded in NSE.
(latest close >= latest ema (latest close, 50) and
latest close >= latest ema (latest close, 200) and
latest close >= latest sma (latest close, 50) and
latest close >= latest sma (latest close, 200) and
market cap >= 500 and
latest close >= 50 and
latest RSI (14) > 40 and
weekly RSI (14) > 60 and
monthly RSI (14) > 60 and
latest sma (latest volume, 7) > latest sma (latest volume, 30) and
weekly close >= weekly supertrend (10, 3) and
latest volume > 1000000 and latest volume > 1 day ago volume))
Market capitalization > 500 AND
RSI >40 AND
Current price > DMA 50 AND
Current price > DMA 200 AND
Current price >50 AND
Volume >1000000 AND
Return on capital employed > 22%
Avoiding common mistakes when using RSI
Traditionally RSI over 70 is considered as overbought. However, a “high” RSI over 70, is neither good nor bad but may indicate that a security is temporarily overbought. Often stock price moves up even if RSI is relatively high. Keep an eye on the RSI if it falls below 40 or gives any divergence signal to exit from the stock.
If the RSI is high for a long period and the stock price is also moving up, to exit from the stock keep an eye on the 50-day simple moving average (SMA). Once the stock starts trading below RSI (40) or below the 50-day SMA, exiting or booking profit from the stock is a better option.
If the general market is in an uptrend, RSI above 70 is even better signaling an uptrend of the stock. RSI is a momentum indicator, it indicates the speed and velocity of the stock. Do not sell the stock if RSI is above 70, rather keep an eye on it.
Final Words on RSI indicator strategies for beginners
As a beginner trader, it’s essential to remember that RSI is just one tool in your trading arsenal. Always conduct thorough research, use proper risk management, and consider RSI in the context of other factors. The journey of trading can be both thrilling and challenging, but with the right strategies and patience, you can navigate the market waves successfully.
RSI is a powerful indicator, but it’s essential to practice and learn from both successes and losses. Over time, you’ll develop your trading style and approach. Happy trading!
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