The Relative Strength Index or RSI indicator is a tool for technical analysis. It belongs to the oscillator category and is one of the most effective indicators. It is of the leading type, which means it shows signals on the market before the price changes on the chart.
The advantage of this leading function of RSI when trading is that it’s possible to find early signs of market change. The negative side of this function is that RSI, just like many other trading tools, may provide traders with false signals.
Experienced traders recommend using RSI with any other useful indicator or tool. That way, a trader will be able to tell whether the signal is false, real, or premature.
Keep reading our article to improve your Forex trading strategy by adding the RSI indicator. Here you will learn how to use RSI indicator and what other indicators may be combined with the Relative Strength Index.
Day and Intraday Trading RSI Indicator Settings
You probably already know what RSI is in trading, so let’s see how to use it. We will start with day trading and then proceed with intraday type trading.
Day Trading Settings
The Relative Strength Index seems to be showing good results in day trading. But what RSI indicator settings are the most beneficial for day trading? The default setting for this indicator is 14 periods, and it seems to be effective for most types of traders, specifically for swing traders.
But when intraday traders decide to use this indicator when day trading, they choose different settings. The main reason to choose a different strategy is simple — 14 settings sometimes show false signals, even though such occurrences happen rarely.
Some experts recommend lowering the time frame they prefer; others suggest using a lower period when applying RSI to increase index sensitivity. That way, the risk of producing false or premature signals should be lower.
The key takeaway:
- When short-term intraday traders decide to switch to day trading, they prefer lower settings with time periods that range between 9 and 11, and they rarely choose 14.
- The time frame of 14 periods seems to be suitable in medium-term swing trading.
- Some traders that prefer longer-term position trading benefit from higher periods that range from 20 to 30.
When choosing the Relative Strength Index settings, it’s critical to consider your strategy and what other tools you use.
Intraday Trading Settings
The key idea here is to determine how much noise you are ready to process with the data you get. When you figure it out, it will be possible to choose the most effective setting for a specific strategy.
The good news is that no matter what settings a trader uses, it is possible to get experience to recognize real signals in the future. When using the intraday trading option, traders should choose a setting that improves short-term trades. The best choice in short-term trading is to use lower settings for all variables on the market.
Lower settings make the indicator more sensitive to early signals, and it’s crucial in an extremely competitive environment of short-term trading. That way, a trader is able to detect signals earlier than others and buy or sell stock depending on the situation. The best lower setting, in this case, is in between a range of 9 to 11.
How to Spot RSI Indicator Buy and Sell Signals
The RSI indicator enables users to trade by finding entry and exit points. Traders should learn how to identify RSI indicator buy and sell signals to sell or buy stock successfully. Check out below how to use RSI indicator to determine the buy and sell signals.
How to Detect Buy Signals with RSI
As you know, RSI has two lines, one indicating Overbought (at 70) another indicating Oversold (at 30). The buy signal is when the RSI indicator crosses the oversold line and stays above the line.
As soon as the trader notices the indicator crossing the line (30), entering the trade could be a good idea. As mentioned, don’t rely only on the RSI as it may produce false signals depending on the settings you use. Consider adjusting settings depending on your trading strategy.
How to Detect Sell Signals with RSI
It might be a good idea to sell stock when the Relative Strength Index crosses the overbought line at 70 and stays below the line. Signals depend on the settings, and they may appear more or less often.
For example, if a trader chooses to use a lower time frame, the indicator becomes more volatile. In this case, the RSI indicator produces more signals, and not all of them may be useful at identifying a trend.
What Indicators to Use with the RSI?
Creating a strategy by adjusting signals to read buy and sell signals is one good idea. But it’s possible to use other indicators to make the strategy even more successful. Combining the RSI during the day and intraday trading with momentum indicators can make it easier to differentiate between false and real signals.
Some experts recommend using MACD and moving average crossover indicators. When you use RSI, it maintains an overbought position for some time. But MACD indicator can reflect divergence. MACD should turn down while the price keeps rising. This combination reflects a potential trend retrace.
EMA indicator can also help by confirming the RSI signal. For example, if EMA 5 line is crossing over the EMA 10 line, it confirms the signal reflected by the RSI indicator.
