From trading oversold and overbought levels to trend determination via the 50 level, the RSI momentum indicator makes up the backbone of many different types of strategies. That concludes our series on the RSI Indicator.
Use stop orders for your entries as this will show that at least in the short term, momentum is in your favor. There may be times that the candlestick that gives the buy or sell signal is quite large. Either reduce position size or wait until there is a pause or retrace in price.
There will be times that the RSI flips back and forth over the 50 line. This indicates choppy price action and you may want to highlight that price action with lines to show a pattern break. Regardless of the time period you trade, you will run into issues such as price action that indicates chop. You do not want to implement this strategy during those times. Use standard price patterns to contain price movement and wait for the break of the price pattern to occur.
Oversold And Overbought Oversold is a term that is used when price is deemed to have fallen a certain distance away from the average price. Overbought is the opposite of oversold. Quite simply, it makes up the settings for the two trading indicators that will be used in the strategy: RSI trading method short trades. Posted in Simple Swing Strategies. Powered by WordPress Designed by: This trading strategy will rely on a market that is trending. There are trading strategies for non-trending markets but for this, we want to latch onto a move that leads to a large potential swing trade.
We can use structure to determine the trend but for a quick and dirty trend determination, we are going to use the moving average in two ways:. Note that after you have objectively identified a market that is ranging, you can often mark of the support and resistance levels of the range. When price breakouts out of that range with strength and conviction, you may start looking for trending price action.
You can often see the momentum candlesticks breaking from either the support or resistance level that which will tip you off, using price action, that the range is completed. You can see in this graphic that when price chops back and forth through a moving average, you are looking at a market in consolidation.
A gap between the moving average, in our case the 20 SMA, we are looking at a market that points towards a trending market and is what we need to see for this trading strategy. You can use other technical analysis measures to determine a trending or ranging market however price that is not making a trending price pattern, is generally consolidating. The 20 SMA with RSI swing trading strategy in a trending market has the potential to add hundreds of pips to your count.
This is especially true on the higher time frames, four hour and above, as smaller time frames can change their trend direction state more often. As a Forex trader, you are looking at some of the best trending markets available. This is a great strategy to take full advantage of that fact. I find day trading to be a J. We will use a very simple determination for trend direction and that will come via the relationship between price and the moving average.
Note that I also prefer to see a slope in the moving average. The standard look back period is 14 and by using 5 days, we will be able to take advantage of increased momentum sooner. The purpose of the RSI in this trading strategy is to confirm the strength of the trend: Note that we will not be using bullish divergence, bearish divergence or the overbought and oversold levels.
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