How To Trade The RSI

Mar. 19, 2014

I’ve heard many times that, in order to be profitable, you have to trade conventional indicators in an unconventional way.

Meaning: you can’t buy when indicators are Oversold and you can’t sell when indicators are Overbought. You can’t? Let’s find out.

This week I’m going to look at the RSI because I love it. This indicator is very responsive to price action because it’s designed to let you know when a financial instrument is really “strong,” relatively speaking, of course. Conventional wisdom would say that when something is moving really strongly in one direction, it is due to correct itself and head back to equilibrium.

Thus, when RSI goes Oversold, you should buy.

And, conventionally speaking, when RSI goes Overbought, you should sell.

So, how would you use the RSI in an unconventional way?

Well, we would do the opposite, and this seems pretty smart. If a stock is moving really fast in one direction, the trend has been revealed. If something is moving fast in an upward direction, then that’s when you should hop on and go with the strong trend. Nicolas Darvas even told us in his famous book, How I Made $2,000,000 In The Stock Market, that the best way to make money is by buying things that go up.

Instead of going the opposite direction in the face of the relative strength of a financial instrument, we should take the path of least resistance and just go with it. In other words, when a currency goes up to Overbought, we should get on board and buy. And when a currency is plummeting, we should hop on and sell.

I had a Robot built to do just that. When the USDJPY hits Oversold on the RSI, the Robot would sell and look for a small, momentum-based profit target.

As soon as it hit Oversold, I sold it for a quick 10 pips of profit.

At this point my feeling is that the experts are right, going unconventional is the way to go. I would much rather go for a small target with the strength of a currency on my side. Going for a small target by betting against the current trend just doesn’t seem logical. What do you think?

Well, when I saw the results, I was shocked.

Both methods took about the same number of trades, but It’s not even close. Going with the trend on the RSI barely works at all.

The moral of this story, as always, is not to blindly listen to any expert who tells you how to do things. In fact, sometimes you can’t even listen to what your own logic is telling you. The only way to find out the truth is to test.

And then test some more.

Disclaimer:
It should not be assumed that the methods, techniques, or indicators presented in these products will be profitable or that they will not result in losses. Past results are not necessarily indicative of future results. Examples presented on these sites are for educational purposes only. These set-ups are not solicitations of any order to buy or sell. The authors, the publisher, and all affiliates assume no responsibility for your trading results. There is a high degree of risk in trading.

HYPOTHETICAL OR SIMULATED PERFORMANCE RESULTS HAVE CERTAIN INHERENT LIMITATIONS. UNLIKE AN ACTUAL PERFORMANCE RECORD, SIMULATED RESULTS DO NOT REPRESENT ACTUAL TRADING. ALSO, SINCE THE TRADES HAVE NOT ACTUALLY BEEN EXECUTED, THE RESULTS MAY HAVE UNDER- OR OVER-COMPENSATED FOR THE IMPACT, IF ANY, OF CERTAIN MARKET FACTORS, SUCH AS LACK OF LIQUIDITY. SIMULATED TRADING PROGRAMS IN GENERAL ARE ALSO SUBJECT TO THE FACT THAT THEY ARE DESIGNED WITH THE BENEFIT OF HINDSIGHT. NO REPRESENTATION IS BEING MADE THAT ANY ACCOUNT WILL OR IS LIKELY TO ACHIEVE PROFITS OR LOSSES SIMILAR TO THOSE SHOWN.