Rules for Day Trading with the RSI
Here are some rules for using the RSI and its First Derivative for day trading.
- Using RSI as an overbought or oversold timing indicator is very simple. Select your cutoff points (as you do with stochastic). If, for example, you select 25 and 75, then your procedures would be as follows:
- When RSI drops to 25 or lower and then turns back above 25 you buy and use a stop loss either under the lowest most recent low or a risk management stop loss.
- When RSI has been at 75 or higher then sell short when it declines below 75 using a stop loss above the most recent high or use a dollar risk management stop loss.
For procedures a and b you can vary the values. Figure 8-7 shows the use of a 9-period RSI on 30-minuted S&P data with 15 and 85 as the cutoff points. Note my buy and sell points on the chart. As you can see, RSI is a valuable tool for the day trader. Note that RSI turned bullish on 12/9 and remained so through 12/19. This gave the day trader an opportunity to buy every day so long as the bias was bullish because of the bullish RSI.
- Using the First Derivative of RSI (or other derivatives if you wish) is like using an oscillator. The procedure is simple:
- When RSI falls below its First Derivative, sell short and either use a stop loss as the reversal (i.e., RSI closing above its derivative) or use a dollar risk stop loss.
- When RSI goes above its First Derivative, then buy with a stop loss either as a signal reversal or as a dollar risk stop.
In all cases you must remember that a signal is not activated until the time segment has ended. In other words, if you are using a 5-minute chart, RSI will change every time the market has changed price; it is only the RSI value at the end of the 5-minute segment thats considered for timing signal purposes.
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