Description: The Relative Strength Index or RSI is a very popular momentum oscillator among traders of all sorts. Be it swing trading or intraday trading, RSI comes to our mind as a handy tool to interpret the market’s momentum.
There is a saying that “momentum precedes price” which means that the momentum of a financial instrument often slows down before an actual turn in price happens. This is just like a car slowing down before taking a U-turn. The very slowing down of the car indicates that a change of direction might be in the offing.
Today, we will discuss RSI 8 trading strategy for intra-day trading. This RSI strategy involves changing the default RSI setting of 14 periods to 8 periods. This makes the indicator more sensitive to price changes. The overbought and oversold settings remain the same at 70 and 30 respectively. Also, we will take a 15-mins line chart based on closing prices. This will make our RSI 8 interpretations more precise as it is calculated based on closing prices.
To start with, we will be looking for momentum changes with the RSI 8 trading strategy. To do so, we will be looking for divergences between price and the RSI indicator. Simply put, when prices are making higher highs, while RSI 8 refrains from doing so and makes lower highs instead, we have a negative divergence / bearish divergence in place. Conversely, when price is making lower lows while the RSI 8 is making higher lows, we have a positive divergence / bullish divergence in place.
However, a divergence in itself is not sufficient reason enough to go long or short on an instrument. It simply indicates a slowing down of momentum. Hence, for confirming our entries, we need to look at the price chart. A chart pattern breakout backed by a divergence on the RSI 8 indicator is the way to go! It confirms that the tide has finally turned.
In the above example of TCS, we can see how confirmed buy and sell signals were generated on a break out of consolidation patterns following a divergence on the RSI 8 indicator.
It pays to wait for chart pattern breakouts following RSI 8 divergences!
If you want to learn more of such interesting and powerful trade setups that have stood the test of time and are still used in today’s world by professional traders, please consider attending our Qualified Market Trader (QMT) stock market course.