{"id":6983,"date":"2011-05-11T00:01:03","date_gmt":"2011-05-11T04:01:03","guid":{"rendered":"http:\/\/club.ino.com\/trading\/?p=6983"},"modified":"2011-05-10T15:48:43","modified_gmt":"2011-05-10T19:48:43","slug":"rsi-%e2%80%93-overbought-oversold-or-overplayed","status":"publish","type":"post","link":"https:\/\/wwwtest.ino.com\/blog\/2011\/05\/rsi-%e2%80%93-overbought-oversold-or-overplayed\/","title":{"rendered":"RSI \u2013 Overbought, Oversold, or Overplayed?"},"content":{"rendered":"

\"\"The RSI can be an essential tool in a traders arsenal when used correctly. The problem is that there are a million trading styles and there is no one, single way to use an indicator. So what works best for you? In our quest to bring you tips and tricks from some of the best traders of all facets of trading we have invited Mark Hodge, Head Trading Coach at Rockwell Trading<\/a> as a guest today. Mark is going to share how he uses the RSI, and if you have a similar trading style it could have a profound impact on your trading.
\n---------------------------------------------------------------------------------------------------------------------------------------------------------------
\nRSI is an indicator that is often used to identify overbought and oversold conditions when trading. Unfortunately, most traders use this indicator too literally, and miss out on some of the biggest trends. In this article I will introduce how RSI is typically used, and share a different way to use this indicator that could have a significant impact on your trading.<\/p>\n

The Relative Strength Index, or RSI, is a popular indicator developed by Welles Wilder, and was first introduced in the book New Concepts in Technical Trading Systems. RSI is a momentum indicator used to measure changes between higher and lower closing prices.<\/p>\n

RSI is plotted between 0 and 100. Wilder considered readings below 30 to be oversold, and readings above 70 overbought. At face value, overbought conditions are usually ripe for a pullback, while oversold conditions can be used to identify buying opportunities.<\/p>\n

\"\"<\/p>\n

To identify these conditions on a chart, I\u2019ve highlighted bars green when RSI is below 30 (oversold), and red when RSI is above 70 (overbought). At first glance, buying oversold conditions and selling overbought conditions looks like a great way to trade a market. Conservative traders will typically wait for RSI to drop back below 70 before going short, or above 30 before going long.<\/p>\n

This method might be a great way to trade choppy or sideways market conditions, but in trending markets, traders often miss great moves. Or even worse, traders might find themselves on the wrong side of the trend. Because of this, I use RSI in a much different way.<\/p>\n

Working with RSI, I discovered a curious thing: RSI remains overbought or oversold in the strongest trends! Let\u2019s look at a chart.<\/p>\n

\"\"<\/p>\n

In the chart above, RSI readings below 30 are colored red, while readings above 70 are colored green. You will notice that in trending markets, RSI will remain overbought or oversold for a prolonged period of time.<\/p>\n

How can we use this to our advantage? By looking for RSI to be overbought or oversold when looking for trends!<\/p>\n

With my trading I actually use RSI to confirm a trend whenever I am trading trend following strategies. In fact, this is one of my trading rules, one that usually keeps me out of weaker moves.<\/p>\n

3 things to consider:<\/p>\n

1)\tThe default setting for RSI is typically 14. As a day trader, and to get better signals when using RSI for trends, I prefer a 7 period setting.
\n2)\tI do not use RSI as the sole indicator for making trading decisions. I personally find that a second indicator is important for determining market direction. At Rockwell Trading, our strategies rely on MACD and Bollinger Bands in addition to RSI. We find that these indicators are a nice compliment to RSI, especially when using this indicator to confirm a trend.
\n3)\tIn my experience, this concept is most effective for day trading. As with any indicator or method, it\u2019s important to do your own due diligence and test a concept before risking money on a trading idea that is new to you.<\/p>\n

Take a look at RSI oversold and overbought conditions and consider combining RSI with your favorite indicator(s). You might be surprised at just how powerful RSI is for identifying the strongest trends in the markets you trade.<\/p>\n

Best,
\nMark Hodge
\nHead Coach
\nRockwell Trading<\/p>\n

Mark is a trader and Head Coach at Rockwell Trading. If you would like to learn more about day trading, click here to get your free copy<\/a> of the bestselling book \"The Complete Guide to Day Trading\" - Click Here to download it now<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"

The RSI can be an essential tool in a traders arsenal when used correctly. The problem is that there are a million trading styles and there is no one, single way to use an indicator. So what works best for you? In our quest to bring you tips and tricks from some of the best […]<\/p>\n","protected":false},"author":41,"featured_media":0,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"footnotes":""},"categories":[1],"tags":[7948,3439,3826,237,3440,266,3825,9,3498,354],"class_list":["post-6983","post","type-post","status-publish","format-standard","hentry","category-general","tag-guest-bloggers","tag-mark-hodge","tag-or-overplayed","tag-oversold","tag-rockwell-trading","tag-rsi","tag-rsi--overbought","tag-technical-indicators","tag-the-complete-guide-to-day-trading","tag-trend"],"yoast_head":"\nRSI \u2013 Overbought, Oversold, or Overplayed? - INO.com Trader's Blog<\/title>\n<meta name=\"robots\" content=\"index, follow, max-snippet:-1, max-image-preview:large, max-video-preview:-1\" \/>\n<link rel=\"canonical\" href=\"https:\/\/www.ino.com\/blog\/2011\/05\/rsi-\u2013-overbought-oversold-or-overplayed\/\" \/>\n<meta property=\"og:locale\" content=\"en_US\" \/>\n<meta property=\"og:type\" content=\"article\" \/>\n<meta property=\"og:title\" content=\"RSI \u2013 Overbought, Oversold, or Overplayed? - INO.com Trader's Blog\" \/>\n<meta property=\"og:description\" content=\"The RSI can be an essential tool in a traders arsenal when used correctly. 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