How I Use RSI

I felt it was pertinent to do a few posts talking about some of the indicators and oscillators I use in my trading strategy.  Instead of going into a full blown thesis on the use of oscillators and momentum indicators, we’re going to keep it actionable here and dispense with the philisophical argument over why and how the indicators are important or relevant at all, let’s just take it for a given.

RSI is an important indicator for me due to the fact that it keeps me honest within the trend and taking profits in my overbought positions.  Some trend traders like to take profits based on feel, they can just sense when it’s time to take some off the table.  Kudos to them, seriously, if they have honed their skills over the years to the point when they can just kind of sense when the right time is to be pulling in the reins, I envy that.  I like to use a bit more statistical firepower when making decisions and the RSI is important in this manner.

As I said, the main use of the RSI is to keep me honest in my position sizing.  If I have chosen to load up and go overweight on a position within the trend, normally as it pulls back to it’s 20 day moving average, or breaks out of a flag, I like to pare back that position as it gets overbought and extended, normally to a 3/4 position.  Let’s take a look a few charts now for some examples as to exactly what I’m looking for on the RSI.

Now remember, the RSI reading above 80 does not mean that the stock can not advance further, it is simply a yellow light for the stock and a red light for adding to or taking new positions.  I believe that if you adhere to this principal you’ll save yourself from taking entries into stocks that will produce failed breakouts, or break out and spend a good deal of time consolidating or showing sloppy patterns.

Remember that the RSI should not be used in a vacuum to make decisions, it is best used as part of a holistic technical strategy which looks at several indicators and oscillators.

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