Getting the Most Out of the RSI
08/24/2011 4:00 pm EST
Markus Heitkoetter, CEO of Rockwell Trading, explains his somewhat unconventional usage of the Relative Strength Index (RSI) in his daytrading.
Many traders are looking for that one indicator that can give them an edge in the markets. One popular indicator is called RSI, and our guest is here to talk about that today, Markus Heitkoetter. So Markus, what is RSI?
RSI is the Relative Strength Index that was developed by Welles Wilder in the 70’s. It is an oscillator, so you are looking at values between 0 and 100, and the classic use of this indicator is if it shows a value above 70, it is supposed to show that the market is overbought and is due for a short-term correction.
At the same token, if the value is below 30, the market is oversold and should turn around again. But I have found that this is not the case.
I was going to say that almost sounds a little bit too easy, so what else do I need to know about this?
I have figured out that especially when daytrading, if you see that the RSI pops above 70, it is indicating a strong trend and it stays above 70 for quite a while. So this is how I like to measure the strength of a trend.
If I see that the RSI pops above 70, I am more inclined to take a long signal and hold a position until the RSI then dips below 70 again.
And how many times a day can I expect RSI to give me a signal to do this?
Well I like to trade the morning session, the first two hours between 9:30 am and 11:30 am ET, and you can expect maybe one or two signals depending on the market.
There are markets that are nicer trending than others, and in these trending markets, you might get two or three signals; in other markets, maybe zero to one per day.
I know every indicator isn’t perfect; there are times when the signal will fail or not act as it should. How much success can I expect to have with RSI?
Well this is why I like to combine indicators. I never rely on one indicator alone. I like to confirm it with a second and a third indicator, so the three indicators that I like to use are RSI, Bollinger Bands, and MACD (Moving Average Convergence Divergence). By combining indicators, I am eliminating some of the false signals.
See video: Daytrading with Bollinger Bands
So if all three of those line up, you are into a trade?
Yes, and what I have figured out is that three indicators is the perfect amount of indicators because if you are adding more, you might get conflicting signals; with three, you get nice confirmations.
I know virtually every platform these days has RSI built in. Are there any settings that I need to be aware of?
No, as a daytrader, I like to use the RSI with the setting of seven, meaning that I am looking seven bars back.