Which RSI trading strategy is best?
The little-talked-about reality is that there is no one magic RSI strategy that works for everyone.
Yes, traders do use the RSI successfully.
But the key is that they have all customized it to suit their personality and the market they trade.
It can potentially be used in any trading market and it's a very flexible strategy that can be used in several different ways.
You have to review the RSI trading strategy options, pick a couple that make sense to you, then backtest them throughly to find out if each one has an edge.
If a strategy isn't profitable, you can experiment with the settings and inputs to see if you can make it profitable.
Even after you have a successful backtest, you can continue to work on optimizing the strategy to make it line up with your goals.
So in this article, I'm going to give you a list of all of the RSI trading strategies that I know about, so you can start this process for yourself.
I'll also include some of my own backtesting results and give you links to RSI related resources that you can use to become a RSI expert.
Alright, if you're ready to become a RSI ninja, let's get into it.
RSI History and Calculation
Before I get into the actual strategies, if you're new to RSI trading, then take a minute to read about who invented it and how this indicator is calculated.
This may seem a little boring, but it's very important to understand the benefits and limitations of the RSI.
Knowing how RSI is calculated and what it tells you will allow you to get the most out of it.
I've written a complete breakdown of the RSI here.
Now let's get into the actual strategies.
RSI Overbought/Oversold Trading Strategy
The traditional use of the RSI is to identify potential turning points on the market.
When the indicator goes oversold, that can mean that too many traders are short and the market is ready for a reversal.
On the other hand, when RSI is overbought that can mean that too many traders are long.
In other words, this is a countertrend trading strategy that looks to trade trend reversals.
Indicator Settings
The most commonly taught use of the RSI Overbought/Oversold Strategy uses the following settings:
- Periods: 14
- Levels: 70/30
Traders usually wait until RSI starts to form a peak or bottom out, before they sell or buy.
Trade Entry
Here's the most common entry:
- Sell: When the RSI peaks above 70
- Buy: When RSI peaks below 30
Short Example
When RSI enters the overbought signal level, you can wait for it to peak to take a short trade.
Long Example
In this example, price had a nice upside run after RSI went into oversold territory.
Of course, not all trades work out this well, but these are examples to illustrate the point.
If you are missing a lot of RSI signals, be sure to check out our standard RSI alert indicator for MT4.
Stop Loss and Take Profit
The stop loss is set above or below the last swing high/low.
A good take profit is the next support or resistance level, but you can experiment with different levels to see what works best for you.
Here's an example short trade.
Potential Improvements
You can (and should) backtest this strategy as-is.
But if you're looking for ways to optimize this strategy then I'm also going to give you methods to potentially to improve you results.
Remember that all improvements should be backtested and do not guarantee better results.
They are just ideas that you can use to experiment with your strategy.
Here are a few things that you can try:
- Take a trade as soon as RSI closes inside the signal levels
- Change the periods setting
- Only take trades when price is at clear support or resistance
- Change the signal levels to 80/20 or 90/10 to potentially weed out noisy signals
- Use another indicator in conjunction with RSI to improve win rate or profit per trade
- Set the profit target to a multiple of risk
RSI Divergence Trading Strategy
Another way that you can use RSI is as a divergence indicator.
This means that if you spot RSI trending in the opposite direction of price, it's a possible signal that price is going to reverse.
To learn more about RSI Divergence, read this article.
Indicator Settings
The most commonly taught use of the RSI uses the following settings:
- Periods: 14
- Levels: 70/30
Trade Entry
Here's the most common entry:
- Sell: When price shows a second higher peak, but RSI shows a lower peak and the first peak is overbought
- Buy: When price shows a second lower peak, but RSI shows a higher peak and the first peak is oversold
Short Example
So in the chart above, the blue line on the chart shows the two price peaks going higher, while the RSI peaks are going lower.
This signals a possible reversal of the uptrend.
As you can see, price does drop from this point, but depending on your profit target, it may not have been enough to hit your profit target.
There are at least two other divergences on this chart.
Can you spot them?
These signals can be hard to spot, so it's very useful to have a RSI divergence indicator.
Long Example
Stop Loss and Take Profit
The stop loss usually goes above the second high for a short and below the second low for a long.
As far as the take profit, a good place to set it is the next support or resistance level.
Potential Improvements
Here are a few things that you can try:
- Change the periods setting
- Change the signal levels to 80/20 or 90/10 to potentially weed out noisy signals
- Use another indicator in conjunction with RSI to improve win rate or profit per trade
- Set the profit target to a multiple of risk
- Take trades even when RSI doesn't go into overbought and oversold
RSI Exit Trading Strategy
As you know, when you get into a big trend, RSI can stay overbought or oversold for a long time.
This can lead to big losses if you continue to fight it and you don't have something like a 2-Strikes Rule.
So an alternative to entering a trade when RSI hits the signal level and starts to turn, is to enter the trade when RSI exits the signal level.
This may mean that you catch the entry late, but it makes it much less likely that you will be fighting a big trend.
Indicator Settings
The most commonly taught use of the RSI uses the following settings:
- Periods: 14
- Levels: 70/30
Traders usually wait until RSI starts to form a peak or bottom out, before they sell or buy.
Trade Entry
Here's the most common entry:
- Sell: When the RSI gets above 70, sell after RSI closes below the 70 level
- Buy: When RSI gets below 30, buy after RSI closes above the 30 level
Short Example
Long Example
Stop Loss and Take Profit
The stop loss for this strategy would go below the low for a long and above the high for a short.
Placing the take profit at the next support or resistance level is the best exit to start testing.
Potential Improvements
Here are a few improvements to this strategy you can experiment with:
- Change the periods setting
- Only take trades when price is at clear support or resistance
- Change the signal levels to 80/20 or 90/10 to potentially weed out noisy signals
- Use another indicator in conjunction with RSI to improve win rate or profit per trade
- Set the profit target to a multiple of risk
Larry Connors RSI 2 Trading Strategy
Now we get into a really cool RSI trading technique.
This is the RSI 2 strategy by Larry Connors.
It's also a good example of using a complementary indicator with the RSI.
Basically, the RSI indicator is adjusted to a 2 period setting and the signal levels are moved to 95 and 5.
After that, we use a 200 EMA to determine if we should go long or short.
Above the EMA is long, below is short.
When price hits a RSI trading signal level and is in the right position, with respect to the 200 EMA, then you take a trade. You exit when price closes above (for a long) or below (for a short) a 5 EMA.
All of the long signals are marked in the chart above, with red vertical lines.
Obviously, this is a very short-term strategy.
Indicator Settings
The most commonly taught use of this method uses the following settings:
- RSI periods: 2
- RSI levels: 95/5
- Simple Moving Average: 200
- Simple Moving Average: 5
Trade Entry
- Sell: When RSI is overbought and price closes below the 200 SMA
- Buy: When RSI is oversold and price closes above the 200 SMA
Short Example
Long Example
Stop Loss and Take Profit
There are no stop losses with this strategy.
Connors found (as have I) that this strategy works best without stop losses.
The exit for this strategy is when price closes on the other side of the 5 SMA.
This strategy is more of a short term strategy that closes trades fairly quickly.
Potential Improvements
Here are a few improvements to this strategy you can experiment with:
- Change the periods setting
- Only take trades when price is at clear support or resistance
- Change the signal levels to 80/20 or 90/10 to potentially weed out noisy signals
- Use another indicator in conjunction with RSI to improve win rate or profit per trade
- Set the profit target to a multiple of risk
Backtesting Results
You can also see my results of a backtest here.
RSI 50 Crossover Trading Strategy
The previous RSI trading methods rely on price extremes to find potential trading ideas.
Of course, trading at extremes can be a great way to get in for cheap.
However, you are also bucking the trend and that can mean that you might get stopped out a lot.
One way to possibly remedy this is to try to catch price when it is starting to trend.
For this strategy you set your levels both to 50, then enter a trade when RSI closes above or below the 50 level.
Indicator Settings
The most commonly taught use of the RSI uses the following settings:
- Periods: 14
- Set both levels to 50
Trade Entry
- Sell: When RSI has stayed above the 50 for awhile, go short when RSI closes below the 50 level
- Buy: When RSI has stayed below the 50 for awhile, go long when RSI closes above the 50 level
Short Example
Long Example
Stop Loss and Take Profit
The best place to set the stop would be above the last swing high for a short, or below the last swing low for a long.
Like with all of these strategies, a good place to start with the profit target at the next support or resistance level.
Potential Improvements
Here are a few improvements to this strategy you can experiment with:
- Change the periods setting
- Only take trades when price is bouncing off clear support or resistance
- Use another indicator in conjunction with RSI to improve win rate or profit per trade
- Set the profit target to a multiple of risk
- Look for reversal price action like a head and shoulders or double top/bottom before the crossover
Final Thoughts
So I hope that these RSI ideas have given you a few things that you can test.
Remember, there isn't one best way to trade the RSI.
You have to find the one that works best for you and the markets you trade.
But sometimes you just need a few ideas to get your creative juices flowing.
The next step after reading this article is to start backtesting your RSI trading strategy.
Have fun!
