For ease of traders and for maximum profitability various indicators have been developed from time to time. This includes MACD, RSI, moving average, Bollinger Bands etc. However with the advent of so many indicators, and experts guiding through almost all of them, it has become really confusing for the common men traders to choose the right indicator for their trading style.
Some are long-term investors while some are short terms. Some, on the other hand, are intra-day traders. Depending on the style of trade, it is important to the appropriate indicator.
Need Fast Decision Making Skill
As the title indicates we will be focussing on day trades here. Day trading is a fast n prompt mode of trading. Fast decision-making skills are needed here. Monitoring too many indicators will not only be time-consuming but will also be counterproductive. Following too many indicators to make your decision can actually deteriorate your trading performance. Stocks, forex or futures- may what your deals when engaged in day trading, the rule is to keep it simple.
Among all the available indicators we think Relative Strength Indicator, popularly known as RSI is the most efficient to follow for a day trade.
Merging the default 14-period RSI( I.e. looking back 14 bars on the graph to create its reading) with resistance zones while day trading can help one attain a high reward-to-risk ratio.
Although theoretically it is recommended to sell the stocks when the RSI touches 70 and a buy when it falls to 30, it is not universal. In the case of day trades, it is equally important to analyse the volatility and RSI history before making a decision.
Strategy For Short and Long Day Trade
For a SHORT DAY TRADE ( a smaller period, using a shorter RSI of about a nine bars on the graph) an indication of RSI above 70 means that the price of the share is in a resistance zone. For such cases, it is recommended to sell your stocks below any bearish price bar.
Similarly, for a LONG DAY TRADE ( using 25 periods RSI line ) the indicator signal below 30 indicates a support zone. During a downtrend make use of the centre line to check shifts in the trend for determining market direction. Next, buy stocks above bullish price bar.
The 80-20 RSI Trading Strategy is used as an RSI stock strategy, RSI forex strategy.
Thus figuring out your own support and resistance zones with fewer trades will help you trade smoothly with RSI indicator.
Keeping an eye on candlestick analysis or trend line analysis along with RSI will help one trade better with a higher profit bar.