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The RSI (Relative Strength Index) strategy is perhaps the most famous “momentum oscillator” in trading. It compares the magnitude of recent gains to recent losses to determine overbought or oversold conditions.
How Logic Works
The RSI oscillates between 0 and 100.
- Long Entry: Triggered when the RSI crosses above the Lower Level (Default: 30) after being below it.
- Short Entry: Triggered when the RSI crosses below the Upper Level (Default: 70) after being above it.
- The Goal: To “buy the fear” at the bottom and “sell the greed” at the top.
Key Customizable Inputs
- Length (Default: 14): The period used to calculate the average gains and losses.
- OverBought/OverSold (Default: 70/30): The extreme levels that define the reversal zones.
Strategic Considerations
- Momentum Extremes: RSI is excellent for identifying when a move has gone “too far, too fast.”
Failure Swings: Traders often look for “failure swings” where the RSI makes a higher low while price makes a lower low, suggesting a strong reversal is coming.
