Trade Forex Trading

RSI Indicator Index Trading Strategy

Relative Strength Index or RSI is one of the most popular/liked indicator used in Indices trading. It's an oscillator indicator which oscillates between 0 -100. This a trend following indicator. It shows the power of the market trend, values/readings above 50 show a bullish trend while values below 50 indicate bearish trend.

RSI Indicator Measures Momentum of a Stock Trend.

The centerline for the RSI is 50 indicator, crossover of the centerline indicate shifts from bullish to bearish trend and vice versa.

Above 50, the buyers have greater momentum than the sellers & price on the trade chart will keep going up as long as this RSI stays above 50.

Below 50, the sellers have greater momentum than the buyers and price on the trade chart will keep going downward as long as RSI stays below 50.

RSI Intraday Trading Index Trading Strategy - Mastering RSI Index Indicator PDF

RSI Indicator - How to Trade with RSI Indicator

In the trading example illustration above, when the indicator is below 50, the price kept moving in a downwards market trend. The price continues to move down as long as RSI was below 50. When RSI moved above 50 it showed that the force had changed from sell to buy and that the downward trend had ended.

When the RSI moved to above 50 the price started to move upward & the trend changed from bearish to bullish. The trade chart price continued to move upward & the RSI remained above 50 afterwards.

From the trading illustration shown above, when the trend was bullish sometimes the RSI would turn downward but it would not go below 50, this shows that these temporary moves are just retracements because during all these time the price trend was generally upwards. As long as RSI does not move to below 50 the current trend remains intact. This is the reason the 50 centerline mark is used to demarcate the signal between bullish & bearish Stock signals.

The RSI uses 14 day period as the default period, this is the period recommended by J Welles Wilders when he introduced the indicator. Other common periods used by traders are the 9 and 25 day moving average.

The RSI period used depends on the trade chart time frame you're using to trade, if you're using day Indices trade chart time-frame the 14 period will represent 14 days, while if you use H1 Index trade chart time-frame the 14 period will represent 14 hours. For our illustration we shall use 14 day moving average, but for your trading you as a stock indices trader can substitute the day period with the chart time frame you are Indices trading with.

To Calculate RSI Indicator:

  • Number of the days that a market is up is compared to number of the days that the market is down in a given time period.
  • The numerator in the basic formula is an average of all the sessions that finished with an upwards price change.
  • The denominator is an average of all the down sessions closes for that period.
  • The average for the down days is calculated as absolute numbers.
  • The Initial RSI is then turned into an oscillator.

Sometimes very large up or down movement in price in a single session price period may skew the calculation of the RSI average & produce a false signal - in the form of a spike.

RSI Center-line: The centerline for this trading indicator is 50. A value above 50 implies that the market trend is in a bullish phase as average gains are higher than average losses. Values below 50 indicate a bearish phase in the market prices are in general closing lower than where it's that they opened.

Overbought and Oversold Levels: Wilder set the RSI overbought & oversold levels at which the market movements are over-extended at 70 & 30.

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