RSI Trading Strategies: 3 Complete Trading Plans

There are plenty of RSI trading strategies available on the internet. But which ones actually work?

…and more importantly, which ones will work for YOU? 

This is what I want to help you understand in this 3-part RSI series.

Most blog posts and YouTube videos give you one or two well-chosen examples and expect you to believe that a certain RSI trading strategy will work for everyone.

That's simply not true. 

The reality is that a strategy has to match your personality and lifestyle for you to be successful with it.

So don't trust that any strategy you find on the internet will work for you.

In this post, I'll give you 3 complete RSI trading strategies.

Test them for yourself. Here's how to get started with testing.

…and in the next post, I'll show you my testing results.

Before we get started, here are two related blog posts:

• Part 1: The RSI indicator explained
• Download the free trading plan worksheet PDF

Now that you have some basic information, let's dig into 3 popular RSI trading methods that can be found all over the internet.

Vanilla RSI Explained

Let's start with the “vanilla” RSI trading strategy. The idea behind the RSI is that it shows you times when price is “overbought” or “oversold.”

So as the theory goes, you should go long when price is oversold and go short when price is overbought, because price is likely to reverse.

This is a “reversion to the mean” type trade.

Most blog posts will tell you to enter a trade once RSI enters back into the channel. But this is where most blog posts stop.

So now let's take it one step further and formulate a complete trading plan from this idea.

Vanilla RSI Trading Plan

Based on what I have read on the internet about this RSI trading idea, here's a plan that I came up with:

• Strategy name: RSICross
• Version: 1
• Currency pair: EURUSD
• Strategy timeframe: Daily chart
• % Risk per trade: 1%
• Stop loss: Other side of last price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 70/30 levels)
• Entry rules: 
  • Look for overbought or oversold condition
  • Open trade when RSI closes back inside RSI channel
• Trade management rules: 
  • 1 position at a time, no stacking
  • Set and forget, no moving of stop

I'm using a 1R profit target because it's a quick and dirty way to see if a strategy has an advantage. It also gives us a definitive profit target.

Some exit methods, like targeting the next support/resistance level can be very arbitrary and will vary from trader to trader.

It's true that some strategies do require a larger profit target to be profitable, but since this is our first test, let's eliminate as many variables as possible.

Simple enough right?

If you don't want to wait around for my next blog post, go ahead and test this for yourself with software like Forex Tester. If you feel that I missed anything in this plan, leave a comment at the end of this post.

RSI Divergence Explained

Another common RSI trading strategy on the interwebs is to use price/RSI divergence to enter trades.

For a short trade, you wait for RSI to close outside of the channel. Then look for price to form a higher high, when RSI has formed a lower high.

…and the opposite for a long trade.

Here's what long entry signal would look like:

…at least that's the theory.

Again, the chart above is a well chosen example. The internet is full of them.

The real key to making it work is in the trading plan and the testing process.

RSI Divergence Trading Plan

• Strategy name: RSIDive
• Version: 2
• Primary timeframe: Daily
• Currency pair: EURUSD
• % Risk per trade: 1%
• Stop loss: Other side of last price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 70/30 levels)
• Entry rules:
  • Look for overbought or oversold condition
  • Look for divergence between RSI and price
  • Avoid trades in heavy trends
  • Look for good separation between the price peaks
  • Open trade when there is a strong candle in the direction of the trade and RSI “hooks.”
• Trade management rules:
  • Trade 1 position at a time, no stacking
  • Set and forget

If you like this strategy, feel free to test it for yourself. Otherwise, keep an eye out for my next blog post.

RSI 50 Crossover

The final common RSI trading strategy is the 50 level crossover.

Unlike the previous 2 strategies, we use the 50 level on the RSI as a confirmation of a trend. So when we think that a trend is in place, we take a short trade when price closes below the 50 and a long trade when it closes above.

This strategy is a bit more subjective because it can be tough to know when price is trending. I can see the potential to get whipsawed a lot.

But I'll give it a go anyway.

Here's an example of a long trade…

RSI 50 Crossover Trading Plan

• Strategy name: RSI50
• Version: 1
• Primary timeframe: Daily
• Currency pair: EURUSD
• % Risk per trade: 1%
• Stop loss: Other side of last minor price swing
• Profit target: 1R
• Indicators used (with settings): RSI (14 period, 50 level)
• Entry rules:
  • Look for strong price trend
  • Enter trade when price closes on the other side of the 50 RSI level
• Trade management rules:
  • Trade 1 position at a time, no stacking
  • Set and forget

Conclusion

Will all of these trading strategies be profitable in backtesting?

Maybe.

…or maybe none of them will be.

That's why we test before ever risking real money with a strategy. 

Stick around for the next post, where I give you the exact stats on how these trading plans test out.

Which RSI trading methods do you think will be profitable? Leave a comment below with your guess or post your own test result.

Disclaimer: Some links on this page are affiliate links. We do make a commission if you purchase through these links, but it does not cost you anything extra and we only promote products and services that we wholeheartedly believe in. 

 

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