The Relative Strength Index (RSI) designed by J. Welles Wilder is a popular and versatile trading indicator.
You can vary your retracement period, combine it with different trading tools, look for divergences, and even draw trend lines on it. Each method produces a unique tool that allows various strategies.
Here you will find seven RSI trading strategies showing the different facets of this powerful indicator. Before you start exploring the trading strategies below, make sure you understand the basics of the RSI indicator.
Also, keep in mind that these trading strategies are not perfect and are unlikely to be profitable when traded mechanically.
However, by examining these various RSI trading methods, you will get some useful information on J. Welles Wilder’s most famous indicator.
LIST OF RSI TRADING STRATEGIES
- 2-Period RSI
- RSI with Support & Resistance Zone For Day Trading
- Divergence with Candlestick Patterns
- Trend Confirmation (Midline Analysis)
STRATEGY 1: RSI2
The 2-period RSI is the brainchild of Larry Connors. This unconventional lookback period makes the RSI an incredible short-term timing tool.
Learn more with these links:
- Explanation of the original RSI2 strategy by ChartSchool
- A modified approach that uses the RSI2 to determine market bias as well
STRATEGY 2: RSI + S/R (FOR DAY TRADING)
If you think trading is like hunting, you will agree that patience is a virtue. This trading method works well for the patient trader.
Its premise is simple. Look for support and resistance zones to confirm oversold and overbought signals respectively.
STRATEGY 3: RSI DIVERGENCE + CANDLESTICKS
Candlestick patterns alone are never enough to call a market higher or lower. You need a tool that can point you to what is happening in a larger context.
The RSI can fill this role if you use it the right way – to identify price divergences.
STRATEGY 4: RSI MIDLINE FOR TREND ANALYSIS
Lines 30 and 70 indicate oversold and overbought respectively in the standard RSI interpretation. But they are not the only lines you should look at.
Another equally significant level is the midline at 50. If the RSI remains above 50, it is likely a bull market. If the RSI stays below 50, a bear market is dominant.
These are two strategies that make use of this observation:
Both setups combine a moving average with the RSI indicator. However, they are not targeting the same trades. Study them side by side to discover their differences.
STRATEGY 5: RSI TREND LINES
The RSI allows direct analysis of the trend line. It means that you can draw trend lines on the RSI as you normally do for price action.
This Trendline Mastery article shows a detailed example of RSI trend line trading using multiple time frames (from weekly chart to 4 hour chart).
Here are 5 trading strategies that can boost your RSI analysis. But don’t try to apply them all at once. You will be confused if you do that.
Go through them one by one and choose the ones that really benefit your current trading style.