- The RSI Trading Strategy explained
- At a glance – RSI Trading Strategy
- What is the RSI?
- What does the RSI tell us and where are its limitations?
- How to trade the RSI Trading Strategy
- RSI Trading Strategy algorithms
- Frequently asked questions and answers about the RSI strategy
The RSI Trading Strategy explained
The RSI trading strategy is a basic and very simple trading strategy. It can be successfully traded with almost any asset. Basically, there is one simple rule: if the RSI value is less than 30, the market is sold off and may soon start to rise; if the RSI value is over 70, the market is overbought and may soon collapse.
At a glance – RSI Trading Strategy
Time needed: 15 Minuten.
The 3 steps of the RSI strategy briefly explained:
- Let profits run, cut losses
Once you have opened your trade, hedge it as soon as possible with a stop loss order. Many traders set the stop loss in a range between 1% and 5%. If the trade is already in profit, you should place the stop loss order in profit above your entry.
- Take Profit
Once you have survived the complete market movement – for example from an RSI 30 to an RSI 70 – take your profit. In the meantime, you may realize partial profits as well.
What is the RSI?
|RSI < 30||Buy|
|RSI > 70||Sell|
For information on the exact calculation of the RSI, see Relative Strength Index on Wikipedia.
What does the RSI tell us and where are its limitations?
When trading the RSI value helps us to assess the current market situation on the different time frames. Logically, an RSI on the daily chart is more meaningful than on the 5-minute chart.
The RSI additionally does not give us any information about the strength of an imminent breakout or collapse. A strong correction in the RSI does not necessarily mean a strong movement in price. For a better interpretation of the RSI regarding price fluctuation, I recommend to additionally consider the MACD (Moving Average Convergence/Divergence) as an indicator.
How to trade the RSI Trading Strategy
First of all: Usually you use the RSI only as an orientation. With enough experience you will utilize other indicators to confirm your buy and sell decisions.
Step 1: RSI Trading Strategy Opening
First, look at the RSI value on the timeframe you want to trade on. If you are a day trader, start with the hourly chart. Then analyze the daily chart and if possible also the weekly chart. For the entry you can use timeframes below your main timeframe, for example 30 minutes or 15 minutes. If the RSI confirms on all time frames, for example for a long trade with an RSI below 30, you have a good entry for your position.
Step 2: Let profits run, limit losses
Once you have opened your trade, let profits run, but be sure to hedge your trade with a Stop Loss order. The distance you set your stop loss at defines how much money you are willing to lose per trade. Many traders set a stop loss at 5%, but with leverage and high risk, 1% is often more appropriate.
Experienced traders set the stop loss above the entry value as soon as the trade is in profit and pull it up with sufficient distance. However, this procedure requires a lot of experience and a little skill.
Step 3: RSI Trading Strategy Take Profit
If you have survived a complete market movement up to the RSI value of 70 or higher, the first take profit is usually recommended here. Experienced traders often take first partial profits from their trades and never close the position completely in case of a further rise.
A price target that you set before the actual trade helps in the later decision making when taking profits.
RSI Trading Strategy algorithms
This form of simple trading based on the RSI indicator is particularly suitable for algorithmic trading. Many trading bots work according to simple comparison patterns and simply check the RSI at different levels. Unfortunately, due to this fact, RSI trading becomes more and more difficult, the more bots and traders are trading a strategy, the harder it is to make profit with it due to the increased competition.
Frequently asked questions and answers about the RSI strategy
The Relative Strength Index (RSI) is an oscillating indicator that is intended to assess whether an asset is overbought or oversold. It ranges between the values 0 and 100.
It depends on your particular situation. In the standard interpretation, an RSI with a value less than 30 is seen as a sign of an oversold market and an RSI with a value greater than 70 is seen as a sign of an overbought market.
The RSI can be displayed with most charting tools such as TradingView, Cryptowatch or directly on the interface of the exchange you are using. The option in question is usually located under a button labeled “Indicators” or something alike.
A high Relative Strength Index can be interpreted in two ways. On the one hand, an RSI above 50 can be seen as confirmation of an uptrend, on the other hand, only an RSI above 70 could be seen as high and as a signal for an overbought market.
A low Relative Strength Index can be interpreted in two ways, just like a high one. On the one hand, an RSI below 50 would be a possible confirmation of a downtrend, on the other hand, an RSI below 30 would be a possible signal for an oversold market.
The term “oversold” refers to a condition in which an asset has been trading at a lower price and has the potential to rise in price. An oversold condition can last for a long period of time and therefore does not mean that a price recovery will occur soon or at all.
Overbought is a term used when an asset is believed to be trading above its market value. Overbought generally describes the recent or short-term movement in price of the asset and reflects the expectation that the market will correct in the near future.
Important risk notice:
This service or the provider advertised here is only suitable for professional traders. Users without sufficient experience usually suffer a total losswhile trading here. Trading with leverage is highly risky and leads to poor risk management. Use this service only as a professional trader with sufficient experience in trading and leverage.
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