Relative Strength Index Masterclass Part 2Relative Strenght Index Part 2
In the previous masterclass, we saw the two different ways of using the Relative Strength Index as an indicator. In Part 2, we'll look out for two other ways to use RSI along with other indicators.
The two previous ways were:
1. Oversold-Overbought Region
2. 50-Level RSI Midline
Moving forward the two more ways are:
3. 2-Period RSI + Simple Moving Average (SMA)
2-Period RSI:
2-period RSI is the shortest and most volatile RSI signal which can be used
A 1-period RSI cannot be used as it will merely give just two values, either 0 or 100 as a 1-period RSI will consider values from just the last 1 candlestick
2-period RSI will generate trade signals at the local highs and lows of the predominant trend and will lead to a reversal in the market price
Therefore, 2-period RSI Strategy is also known as Mean-Reversion Trading Strategy
The 2-Period RSI will generate a signal using a Threshold of 95-5, with price above 95 in the overbought region while below 5 in the oversold region
200-Simple Moving Average:
200-SMA is a Simple Moving Average of the past 200-candlestick
When price moves above the 200-SMA, the market is moving above average and indicate a bullish trend
When price moves below the 200-SMA, the market is moving below average and indicate a bearish trend
Thereby, 200-SMA giving the predominant trend and 2-Period RSI generating trade signals.
Thus Buy when the price is above 200-SMA and RSI<5 while, sell when the price is below 200-SMA and RSI>95.
4. RSI + MACD
RSI:
The RSI will generate a signal once a predominant trend is generated using MACD
The threshold for RSI will be 70-30, with price above 70 in the overbought region while below in the oversold region
The lookback period for RSI is taken as default (14)
MACD:
MACD is a trend-following momentum indicator
MACD is calculated by subtracting 26-period EMA from 12-period EMA, resulting in MACD line
A nine-day EMA of MACD results in Signal line
When the signal line is above the MACD line indicates a bullish signal as small period EMA is greater than the long period
When the signal line is below the MACD line indicates a bearish signal as small period EMA is lesser than the long period
Thereby, MACD giving the predominant trend and RSI generating trade signals.
Thus Buy when the Signal line is above MACD and RSI<30 while, sell when the signal line is below MACD and RSI>70.
A lot more interesting things can be done using RSI, but we'll move to the next indicator in our next Masterclass. STAY TUNED
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- Mudrex
