Trading techniques

Here are some simple patterns to look for. To start, if the14-bar RSI readings are above 60, an uptrend is assumed to be in effect as long as the RSI does not drop below 40. To take advantage of the uptrend, you can apply three strategies.

The first is more of a scalping strategy because the follow-through can be very short-term and the risk of a loss is highest. If the market is in an uptrend, any time the RSI turns higher, upside momentum is turning up and price should rise.

Because there are times when the first RSI upturn does not result in price follow through, traders can wait for the second RSI upturn.

This leads to the second technique: Using a trendline to signal the market is about to resume the uptrend. For example, say the RSI has peaked above 60, signaling an uptrend, but the market falters and the RSI has traced out a second, lower peak. Draw a trendline along the two RSI peaks. When the RSI closes above the trendline, the up momentum is reasserting itself.

The final technique is to look for entry points when the RSI turns up while it’s between 50 and 40, which represents an oversold condition. Use the same trendline penetration technique to signal the trade: The RSI turning up from this oversold condition during an uptrend would signal the momentum is turning up. From here, the market has the greatest potential.

For sell signals, reverse the guidelines for buys: When the RSI moves below 40 and fails to move above 60, the trend is down. It displays the first and second techniques: short term sell signals triggered by RSI downturns (the scalp technique) and the sell signaled by a penetration of a trendline connecting two rising RSI troughs. It shows the third method: Waiting for the RSI to penetrate 50 and then turn down from below 60, breaking a trendline plotted along the rising RSI troughs.