Top 5 RSI Trading Strategies that You Should Use in 2023

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What is RSI?

RSI is a trading tool that stands for the Relative Strength Index. The Relative Strength Index (RSI) is a versatile trading indicator that was designed by J.Welles Wilder.

The Relative Strength Index (RSI) has three key levels including: –

• The 50 level acts as the zero line.
• The 30 level beyond which an oversold condition depicts.
• The 70 level beyond which an overbought condition is evident.

Besides the key levels, the Relative Strength Index (RSI) has a moving line which represents the price on the RSI indicator. 

This line shows the current reading of the indicator on the indicator scale.

You can combine RSI with other chart analysis tools, trade its divergences, draw trend lines on it, among other trading techniques.

It is clear that the RSI can then be used in diverse trading strategies.

Among the diverse trading strategies around the Relative Strength Index (RSI), this post will pinpoint 5 of them which you will find useful in 2023.

Namely;

• The RSI 2 Trading Strategy.
• RSI Divergence with Candlestick Patterns.
• The RSI Midline Trading Strategy.
• RSI with Support and Resistance.
• The RSI Trend Line Strategy.

1. The RSI 2 Trading Strategy.

This strategy involves the use of:

• A long-term moving average.
• A short-term moving average.
• The Relative Strength Index (RSI).
• Price Action.

For the long-term moving average, a 200-period moving average is ideal.

For the short-term one, however, a 5-period moving average is advisable.

The Relative Strength Index (RSI) must be adjusted to 2 periods.

Step 1.

The first step to trading this strategy is establishing a major trend using the long-term moving average of 200 periods.

The major market trend is upwards when the price is above MA 200 and downwards when the price is below MA 200.

Meaning, buying opportunities avail when the price is above the moving average while selling opportunities avail below the same moving average.

Step 2.

The second step is using the Relative Strength Index (RSI) as the entry trigger.

When the RSI reads between 0 and 10, while the price is above MA 200, then that is a buy trigger.

On the other hand, when RSI reads between 90 and 100, while the price is below MA 200, then such becomes a sell trigger.

The best buy triggers are when RSI reads below 5 while the best sell triggers are when the RSI reads above 95.

Step 3.

The third step involves entering buy or sell positions.

Enter a buy position following an upward major trend and an RSI buy trigger, at the open of the candlestick next to the one which coincides with the RSI dip below 5.

On the other hand, enter a sell position following a downward major trend and an RSI sell trigger, at the open of the candlestick next to the one which coincides with RSI surge above 95.

Step 4.

The last step is the trade exit plan.

Exit a buy trade when the price moves above the 5-period moving average and a sell trade when the price moves below the same moving average.

2. RSI Divergence with Candlestick Patterns.

This strategy involves the use of candlestick patterns and the Relative Strength Index (RSI).

The Relative Strength Index (RSI) used here must be adjusted to 14 periods.

The Relative Strength Index (RSI) here is useful for its divergences, which are coupled with candlestick patterns to pick trade entries.

RSI divergences occur when the RSI makes highs or lows which do not match the highs or lows of the price.

If the price makes higher highs, the RSI would be making lower highs (Bearish RSI divergence) and if the price makes lower lows, RSI would be making higher lows (Bullish RSI divergence).

Step 1.

The first step of this strategy is observing price action to be sure what the price is doing.

Is the price making higher highs, higher lows, lower highs,, or lower lows?

Is the price in an uptrend or a downtrend?

Step 2.

The second step is observing the Relative Strength Index (RSI) to see what it is doing relative to the price.

For a successful bearish RSI divergence, the 14-period RSI must be making lower highs when the price is making higher highs.

However, for a successful bullish RSI divergence, the 14-period RSI must be making higher lows when the price is making lower lows.

Step 3.

The third step involves identifying candlestick patterns as entry triggers.

Following a bullish RSI divergence on the falling price, spot a bullish reversal candlestick pattern.

It will be the buy trigger.

On the other hand, following a bearish RSI divergence on the rising price, spot a bearish reversal candlestick pattern. It will be the sell trigger.

Bullish reversal candlestick patterns include the morning star, bullish pin bar, three white soldiers, bullish engulfing, bullish inside bar, and many more.

Bearish reversal candlestick patterns, on the other hand, are such as the evening star, bearish pin bar, three black crows, bearish engulfing, bearish inside bar, and others.

Step 4.

The fourth step of this strategy involves entering buy or sell positions.

Enter a buy position following a bullish RSI divergence and a bullish reversal candlestick pattern which occurs thereafter.

On the flip side, enter a sell position following a bearish RSI divergence and a bearish reversal candlestick pattern which occurs thereafter.

Step 5.

The last step is the exit plan.

Set up Stop Loss for buy order just below the entry trigger and for sell order just above the entry trigger.

Take Profit at recent support or resistance zones either shown by price ranges or price gaps.

3. The RSI Midline Trading Strategy.

This strategy capitalizes on the RSI midline or the 50 level which acts as the RSI zero line.

It uses RSI readings in respect to that midline to pick entries in the direction of the trend.

The strategy uses the Simple Moving Average (SMA) and the Relative Strength Index (RSI) together with Price Action.

The Simple Moving Average (SMA) must be adjusted to 5 periods while the Relative Strength Index (RSI) must be adjusted to 5 periods as well.

The RSI is useful here, for confirmation of price momentum upwards or downwards.

Basically, an RSI reading above the 50 line means that the market is most probably trending upwards.

An RSI reading below 50, on the other hand, means that the market is most likely trending downwards.

That is not entirely so though, thus the need for using the Simple Moving Average and Price Action for confirmation.

Step 1.

The first step of this strategy is establishing the trend using SMA 5 and Price Action.

If the price moves from below to above SMA 5 and is now trading above the SMA, then such is an uptrend.

On the flip side, if the price moves from above to below SMA 5 and is now trading below the SMA, then such is a downtrend.

The price must remain above SMA 5 for more than 10 pips or below SMA 5 for more than 10 pips for a valid bullish or bearish signal.

Step 2.

The second step is confirmation of price momentum using the Relative Strength Index (RSI).

The RSI must be reading above 50 after the price has been trading for over 10 pips above SMA 5 for a buy trigger.

On the other hand, the RSI must be reading below 50 after the price has been trading for over 10 pips below SMA 5 for a sell trigger.

Step 3.

The third step involves the actual setting up of buy or sell orders.

Once the price has met the criteria of a bullish signal and a buy trigger comes up, set up a buy stop pending order 2-5 pips above the high of the candlestick which closes immediately after the events.

However, once the price has met the criteria of a bearish signal and a sell trigger comes up, set up a sell stop pending order 2-5 pips below the low of the candlestick which closes after the events.

Step 4.

The last step is the exit plan.

For the buy order, place the Stop Loss 5 pips below the low of the candlestick above which you placed the buy order.

For the sell order, however, place the Stop Loss 5 pips above the high of the candlestick below which you placed the sell order.

Target at least 3 times your risk or take profit at the recent swing high or swing low.

For the buy order, take profit at the nearest major swing high or target 3 times your stake.

For the sell order, however, take profit at the nearest major swing low or target 3 times your stake as well.

4. RSI with Support and Resistance.

This strategy works best for day traders.

It involves the use of the Relative Strength Index (RSI) in conjunction with support and resistance zones.

The default setting of the Relative Strength Index (RSI) at 14 periods works best.

The Relative Strength Index (RSI) here, is useful in the identification of possible oversold and overbought conditions.

Such conditions are then coupled with support and resistance zones to pick trade entries.

Oversold conditions are when the RSI reads below 30 while overbought conditions are when the RSI reads above 70.

Step 1.

The first step of this strategy is establishing support or resistance zones.

A support zone is a price level where falling prices seem not to cross downwards.

Once the falling price hits that level, it rejects the level or reverses upwards.

A resistance zone, on the other hand, is a price level where rising prices seem not to cross upwards.

Once the rising price hits that level, it rejects the level or reverses downwards.

Step 2.

The second step involves observing the Relative Strength Index (RSI) to generate trading signals.

For a valid bullish signal, you must first have established a support level in the first step, then the RSI must fall below 30.

For a valid bearish signal, however, you must first have established a resistance level in the first step, then the RSI must rise above 70.

Step 3.

The third step involves looking for entry triggers of the identified bullish or bearish signals.

For the bullish signal (support + RSI below 30), look for bullish reversal candlestick patterns at the support.

For the bearish signal (Resistance + RSI above 70), however, look for bearish reversal candlestick patterns at the resistance.

Bullish reversal candlestick patterns include the morning star, bullish pin bar, three white soldiers, bullish engulfing, bullish inside bar, and many more.

Bearish reversal candlestick patterns, on the other hand, are such as the evening star, bearish pin bar, three black crows, bearish engulfing, bearish inside bar, and others.

Step 4.

The fourth step involves entering buy or sell positions.

Enter a buy position following a bullish signal and a buy trigger and a sell position following a bearish signal and a sell trigger.

Step 5.

The last step of this strategy is the exit plan.

Here, set the Stop Loss for your buy position just below the support and just above the resistance for your sell position.

Take Profit at the closest resistance or recent major swing high for the buy position.

For the sell position, however, take profit at the closest support or recent major swing low.

5. The RSI Trend Line Strategy.

I hope you are conversant with trend lines, but you are used to drawing them on the price chart.

Now, this RSI Trend Line Strategy comes as a game-changer because, with it, you draw trend lines on the RSI indicator instead of drawing them on the actual price chart.

Step 1.

The first step of this strategy is applying the Relative Strength Index (RSI) on your chart.

Apply it in its default setting of 14 periods. It can work on any timeframe and so choose your most preferred timeframe.

Step 2.

The next step involves picking pivot points to anchor the trend lines.

For a trend line to be one, it has to pass through a minimum of three pivot points.

Therefore, identify at least three, or even more points on the RSI line, through which the trend line will pass.

Step 3.

The third step involves the actual drawing of trend lines.

Go to drawing tools and choose the trend line. Instead of tapping to apply it on the price chart, tap and apply it on the RSI indicator window.

You can then apply it to at least three pivot points of the RSI line which you had previously identified.

You can always repeat the previous steps and this step to draw as many trend lines on the RSI line as you wish, depending on how many your analysis requires.

Step 4.

The fourth step is the actual analysis of the trend lines drawn on the RSI line.

What kind of analysis did you want to do using the trend lines you drew on the RSI line?

You can carry out all kinds of trend line analysis you would have done on the price chart, on the RSI line.

Do you take a breach of the trend lines you draw as a breakout?

Would you like to use your trend lines as support or resistance?

All that, and much more, is possible with this new approach to trend line analysis.

You will find it fun carrying out your trend line analysis on the RSI instead of the price chart.

Final Thoughts.

Was any of the above RSI trading strategies difficult?

I guess not, because all of them are simple strategies you can apply in your trading without much strain.

The indicators mentioned are ones you can get in nearly all trading and charting software so no plug-ins are required.

Now, would you like to take your trading to the next level in 2021?

If you are nodding yes, then explore the above 5 RSI trading strategies.

They might be the very strategies your trading has been waiting for, before a launch to success.

Happy Trading!

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