An RSI Strategy

Is It Something Worth Looking At?

The Relative Strength Index

RSI may be basic – but it has merit…

RSI or Relative Strength Index is a simple indicator that most of us dismiss in favour of price action. Its main function is to highlight so-called overbought and oversold conditions. And recently I’ve found myself digging into it a bit more…

Let me show you a strategy:

On a daily chart, a market rarely stays oversold for long…

It may only bounce a few days before continuing downwards, but a relentless down move after moving to oversold is a rarity. With the exception of small-cap stocks, an RSI being oversold (<30) or extremely oversold (<20) can be a place to consider a buy.

(Note: I say consider, this is where I feel many traders mess up, they take an indicator as a trigger when I think it’s better used as a filter.)

Similarly – when a market is overbought, I want to avoid buying and let it retrace or consolidate first. I don’t necessarily think it’s short, especially in equities where the long-term trend is up.

Does that mean we can just buy an oversold RSI?

No!

But I think it can mean we start to only focus on longs or at the very least discard shorts. How might we only focus on longs?

Using triggers like:

  • Opening range breakout
  • Prior low break fake
  • Afternoon breakout
  • Above VWAP hold

Can all get us into a long trade on a stretched market after the daily has moved to oversold. (Without overthinking)

And if these don’t trigger, we leave it.

Here’s an example from Crude Oil

RSI (14): Overbought set to 70 and oversold 30 [Defaults]

 
  1. Oil moves into OS territory after breaking a range. The RSI is < 30.
  2. This brings oil into your buy zone, so the next day you wait for a potential trade trigger.

Eg: ORB or prior low break fake

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The next day the prior low breaks and the price then recovers back above the low triggering a ‘low break fake’ long.

In this case with a reasonable $1 stop.

  • Your stop is defined
  • You know the daily is stretched

Odds are good for some kind of bounce…

It’s worth a shot.

You don’t want to overstay your welcome on these, as an oversold RSI doesn’t mean the end of the trend, but a 1-day to 3-day move is possible.

And the RvR is usually tasty.

Today, think if RSI could fit into your playbook anywhere.

Perhaps under certain conditions, the RSI might be a useful tool to help highlight an area to do business. Or a filter to avoid getting sucked in.

Enjoy the RSI rabbit hole!