Relative Strength Index

(RSI)

◙ Usage: Identifying Overbought/Oversold Markets

◙ Trading: Trading RSI Readings | Trading Slope Divergences 

◙ Standard Settings: 14 Periods (we recommend 21 periods)

 

Introduction to RSI

Developed by Welles Wilder, the Relative Strength Index or RSI is a momentum oscillator measuring the velocity and magnitude of directional price movements. The RSI is known for its ability to identify overbought and oversold markets but also to generate trading signals.

 

Calculating RSI

■ RSI = 100 – 100 / ( 1 + RS)

Where,

RS = Average Gain / Average Loss

■ First RS calculation:

Average Gain = Summary of Gains for 14 periods / 14

Average Loss = Summary of Losses for 14 periods /14

■ Second RS calculation:

Average Gain = [(previous Average Gain) * 13 + current Gain] / Average Loss = [(previous Average Loss) * 13 + current Loss] /

■ Same procedure for the third and the subsequent RS

 

Trading with RSI

RSI can be used for multiple purposes:

• Identifying Overbought/Oversold Markets
• Trading Signals on RSI Readings
• Trading Signals on Slopes Divergences (price chart slope vs RSI slope)

As suggested by its developer, the default RSI calculation is involving 14 periods, but we recommend 21 periods.

Identifying Overbought/Oversold Markets

□ In case of a Ranging market, when RSI is found above 70, the market is considered overbought

□ In case of a Ranging market, when RSI is found below 30, the market is considered oversold

□ In case of a Trending Market with downward movement, the value RSI=60 is overbought level

□ In case of a Trending Market with upward movement, the value RSI=40 is oversold level

Recommended Timeframes:

• Short-Term: M5 {the RSI(21) on M5 can prove an excellent signaling machine for intraday trades}
• Longer-term: H1, H4, and D1

 

RSI Intraday Strategy and Trade Signals

RSI can prove an excellent tool for day-trading, but in order to be effective, there are certain requirements. The following system is one of the few trading systems that I have been testing for years and years and it is really working.

Strategy Setup

-Trading only liquid major pairs (EURUSD, USDJPY, GBPUSD, USDCHF, USDCAD, and EURGBP) and never trade Forex Minors or Forex Crosses

-Avoiding carefully news releases (a few minutes before and after)

-The RSI is set at 21 periods

-The RSI(21) is applied to M5 chart

-The target is to trade short-term trend reversals {after strong price movements}

-Targeting 5-20 pips, and Reward/Risk at least 3:1

-The triggers are based on RSI readings

-The triggers adjust according to the current market conditions (Trending/Ranging conditions)

-For Trading Markets, we trade only in the direction of the market

-For Ranging Markets, confirmation for opening positions comes from emerging price divergences

Trade Signals

• Trending Markets

(↑) Open long positions if RSI falls below 40 and rises back above it (only in the direction of the trend)

(↓) Open short positions if RSI rises above 60 and falls back below it (only in the direction of the trend)

• Ranging Markets

(↑) Open long positions if RSI falls below 30 and rises back above it (where the first trough is below 30)

(↓) Open short positions if RSI rises above 70 and falls back below it (where the first peak is above 70)

Money Management

-Reward/Risk at least 3:1

-Targeting 5-20 pips

-It is wiser to use a trailing-stop instead of a fixed-stop

 

Platform Setup

You can install the 'RSI' directly in MetaTrader-4 or MetaTrader-5:

□ GO TO → INDICATORS → OSCILLATORS → RELATIVE STRENGTH INDEX

□ STANDARD SETTINGS → 14 PERIODS

 

 

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StochRSI and DTosc

Introduction to StochRSI and DTosc

StochRSI is an oscillator based on RSI, created by Tushar Chande and Stanley Kroll. Actually StochRSI ‘is an indicator of an indicator’. StochRSI aims to increase the sensitivity of RSI readings and generate more trading signals than the common RSI.

 

Calculating the StochRSI

■ StochRSI = (RSI - Lowest Low RSI) / (Highest High RSI - Lowest Low RSI)

StochRSI measures the level of RSI compared to its high-low range and fluctuates between the values zero (0) and one (1).

	RSI	StochRSI
Overbought	Above 70	Above 0.8
Oversold	Below 30	Below 0.2

The StockRSI center line is at value = .50

-When StochRSI is above 0.50, it reflects an uptrend

-When StockRSIis is below 0.50, it reflects a downtrend

StochRSI Interpretation

For RSI=14 periods, here are some interpretations for StochRSI::

• StochRSI = 0.0 {RSI is at its lowest point for 14 days}
• StochRSI = 0.2 {RSI is near the low of its 14-day high-low range}
• StochRSI = 0.5 {RSI is in the middle of its 14-day high-low range}
• StochRSI = 0.8 {RSI is near the high of its 14-day high-low range}
• StochRSI = 1.0 {RSI is at its highest point for 14 days}

 

Trading with the StochRSI

■ StochRSI Buy Signals

Buy signals occur when the StochRSI crosses above the Oversold Line Level (0.2).

■ StochRSI Sell Signals

Sell signals occur when the StochRSI crosses below the Overbought Line Level (0.8).

Smoothing the Results of StockRSI

As StochRSI is highly volatile, the use of a short-term moving average can smooth the results. A 10-day Simple Moving Average (SMA) of StockRSI can highlight the direction of the master trend, here is how:

■ 10-day SMA of StochRSI above .50 then UPTREND

■ 10-day SMA of StochRSI below .50 then DOWNTREND

Multi-Timeframe Confirmation

Multiple timeframes may be used to confirm the signals produced by StochRSI, as follows:

• M15 signals on H1 timeframe (intraday signals)
• D1 signals on W1 timeframe (swing signals)
• W1 signals on M1 timeframe (long-term signals)

The larger timeframe is used for pointing the direction of the trade and the smaller timeframe for triggering the trade.

StockRSI Conclusions

StochRSI produces a greater number of signals than the original RSI. As this oscillator is highly volatile it should be combined with another technical analysis tool for confirmation. StockRSI trading signals could be confirmed also using Price-Pattern Recognition, Breakouts, Volatility-based Indicators, etc..

DTosc Oscillator Based on StockRSI

DTosc is another oscillator based on StockRSI, developed by Robert Miner. It is designed to identify price waves and generate trading signals.

DTosc Settings

• The four (4) values incurred on DTosc correspond to: {PeriodRSI, PeriodStoch, PeriodSK and PeriodSD}
• The standard settings for DTosc is: 13,8,5,3
• Other settings for DTosc are: (8,5,3,3), (21,13,8,8), (34,21,13,13)

 

Platform Setup

Here are some indicators for MetaTrader 4:

► https://www.mql5.com/en/code/11010

► http://forex-indicators.net/momentum-indicators/stochastic-rsi

You can find some StockRSI indicators for MetaTrader-5 here:

► https://www.mql5.com/en/code/541

► https://www.mql5.com/en/code/16844

 

■ Relative Strength Index (RSI), StochRSI, and DTosc

George Protonotarios, Financial Analyst

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