Tip - Most traders use RSI simply to buy a stock when the indicator hits 30 and sell when the indicator hits 70. If you buy and sell based on this strategy "YOU WILL LOSE MONEY"

Tip - Smaller the period you use to calculate the RSI, the more volatile the indicator will be. For day trading, 10-20 period works well.

How to Use RSI Correctly?

• RSI should be used to identify stocks that are just breaking out of a sideways range
• When a stock is in continuous uptrend, RSI will remain stuck in the overbought region as it cannot go beyond 100. Hence traders must refrain from selling inspite of strong overbought RSI signal as the stock might keep climbing up following its uptrend.
• When a stock is in continuous downtrend, RSI will remain stuck in the oversold region as it cannot go below 0. Hence traders should not buy inspite of strong oversold RSI signal as the stock might keep climbing down following its downtrend.
• The time to sell a stock is when the stock has advanced significantly with an overbought RSI reading.
• The time buy a stock is when the stock has fallen remarkably with an oversold RSI reading.

Tip - If the RSI value is fixed in a region for a prolonged period, it indicates excess momentum and hence instead of taking a reversed position, you can consider initiating a trade in the same direction.

Key components to see in a Valid RSI bottom 

• Double bottom (RSI hits below 30 twice within 1 hour)
• High Volume on first price bottom
• The first bottom on the RSI chart is the first touch of 30 or less in the last 39 bars (typically means half trading day on 5 min chart)

Relative Strength Stop Loss Placement

• With all trades you must use proper risk management, so stop loss is crucial
• You can put your stop about 0.2% - 0.4% below the second bottom of this formation

RSI Profit Targets

• Traders should keep a close eye on the order flow i.e. bid/ask quantity. When the order flow starts dropping you must exit half or all of the position.  

Trading Strategies Using the RSI Indicator

1. RSI + MACD

• In this trading strategy, the RSI indicator is combined with the very popular MACD (Moving Average Convergence Divergence)
• Enter the market only when an overbought or oversold RSI signal is supported by the MACD signal
• Exit when either of the indicators provides an exit signal

• In the above 10 min chart, the green circles show the points where we receive entry signals from both indicators and red circles denote exit points.
• RSI shows an oversold condition which clearly gives buy signal which is later supported by MACD bullish crossover. Hence we go long on this trade.
• After few hours, RSI gives an overbought signal. Since our strategy only needs one sell signal, we close the trade on the RSI overbought reading.

2. RSI + MA Cross

• In this trading strategy, RSI is matched with the Moving Average (MA) crossover. A combination of short MA (typically 4 period) and long MA (13 period) can be used.
• Buy or sell the stock when an RSI overbought or oversold signal is combined with a supportive crossover of the moving averages. 
• Hold the position until there is an opposite signal from one of the two indicators or a divergence on the chart.
• Note - A regular crossover from MA’s is not enough in order to exit a trade. You must wait for a candle to close beyond both lines of the MA’s.

• In the above chart, RSI enters the oversold area with bearish gap open. After few hours RSI exits the oversold territory generating a buy signal which is supported by MA crossover generating second buy signal. As both indicators give buy signal we initiate a buy position. 
• After few hours of strong up move, RSI enters the overbought area followed by a bearish divergence. This is a very strong exit signal and we must immediately exit.