RSi trading guide

2020 05 29

The Relative Strength Index is one of the most widely used and well-known technical indicators, developed by Welles Wilder. RSI is calculated from a price difference or moving averages within a fixed time interval. The RSI gives us an approximation to the market speed, if in a bull market, the RSI starts to go down, it tells us that the rise starts to weaken. It will help us detect turns in the trend by looking at divergences.

The RSI is calculated by dividing the average of the increases in n periods (Hn) by the average of the total decreases in n periods (Bn) plus the average of the total increases in those n periods (Hn):

RSI = Hn / (Bn + Hn) * 100

Calculating it is simple, Hn is the average of the increases in a period and Bn is the sum of the falls in the same period. We are not going to enter to calculate it, but to its interpretation and what strategies with futures can be applied with the RSI.

Trading styles with RSI

The temporary scales vary according to the term of the operation:

  • 5 and 15 minutes for intraday trading
  • 60 minutes and daily for short-term trading 
  • Weekly and monthly for medium and long-term trading

Entry strategies with the RSI

There are many strategies with the RSI, depending on the type of underlying, the characteristics of the trader and their risk tolerance, one or the other can be applied, it is appropriate to test the strategies beforehand, based on monetary management, volatility and space temporary to see what type of investor we are and in each asset what strategy to follow.

“Zone exit” strategy

The RSI is limited between 0 and 100, therefore two zones can be distinguished, one of overbought, and another of oversold. This range can vary but is generally used between 70 and 100 for overbought and between 0 and 30 for oversold, although it depends on the asset, it can be adjusted to more optimal levels.

This strategy with the RSI consists of buying when the RSI leaves the oversold zone and selling short when it leaves the overbought zone.

The operation will be closed  when the RSI re-enters the overbought or oversold zone, depending on the operation performed, whether it is long or short.

In the graph taken from the iBroker platform we can see how there is a first bearish signal that would give us an entry that would produce losses, to later return to give another bearish signal with higher benefits.

The position is closed when the RSI enters the overbought zone (for a bullish trade) and when it enters an oversold (for a bearish position).

Failure swing strategy

This strategy with the RSI consists of selling short when the RSI fails to reach (in the overbought zone) a level higher than the maximum previously reached. The purchase strategy occurs when the minimum is not less than the minimum previously marked.

It is difficult to correctly locate these figures a priori, it is a very subjective technique. You have to wait at least a period to confirm the relative ground. We will open short positions when there is a “failure swing” in the overbought zone and we will open bullish positions when the “failure swing” occurs in the oversold zone.

Divergence strategy

The “divergence” strategy with the RSI combines a “failure swing” with the evolution of the price. The position will only open if the RSI and price diverge. When we observe that the price and RSI lows are diverging, it means that we could approach a trend change from bearish to bullish. On the other hand, when the maximums of the price and the RSI are divergent, we could find ourselves facing a change in the trend from bullish to bearish.

The explanation for the divergence is due to the fact that the RSI shows a lower value in the second maximum, which means that the average of the sum of the rises with respect to the sum of the rises and falls is less than in the previous moment (second peak less than the first) which would be giving price weakness.

As the average of the rises is lower, it gives us an indication that the price may be weakening.

To test these different entry patterns with the RSI in different market situations and different futures underlying you can do it with the  demo account of iBroker, who has a wide range of futures and a very intuitive platform.

 

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