Rsi period 14 why

The RSI is one of the most popular indicators for forex traders, cryptocurrency traders, stock traders and futures traders. But it is not the indicator itself that makes users of the RSI successful in trading. Traders must spend the time to back test an RSI trading strategy to make sure it has worked in the past and then test that strategy in a live trading environment with good trading discipline to have the best chance for a profitable trading strategy that works in the future.

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What is a good RSI to buy? How do you trade with RSI? How do you use RSI strategy? Conclusion: Is RSI a good indicator? For longer term trading the number might be increased but, as mentioned in the lesson, fewer trading signals will be generated but they will have a greater level of reliability associated with them Conversely, if you lessen the number of periods in the equation, more trading signals will be generated but they will have a lower level of reliability Just by way of a quick review, the RSI gives its textbook buying signal when the it has been below 30 and then closes above The textbook selling signal is provided from RSI when it has been above 70 and then closes below The first RSI on the chart below in yellow is the standard 14 period version.

Based on the above criteria, a buying or selling signal was generated in each of the red circles for a total of 5 signals. On the second version in blue we have shortened the number of periods to 9. As can be seen, the indicator becomes much more sensitive and the difference in the number of signals generated is readily apparent. The total on this version is If one compares the signals themselves to the price action on the chart, we can see that some of the signals were valid and would have generated pips while others were simply a short lived blip on the chart The last version of the RSI in red is set at 25 periods.

We can see the smoothing effect that increasing the number of periods has. Also, we note that not one signal is generated during the time frame encompassed by the chart. When a signal does appear, however, it will have greater level of reliability behind it than either the 9 or the 14 period. After all of the above is said, a trader can set the period to whatever they find best serves their trading style and strategy. This can be accomplished through experimention with various time frames and logging the results.

However, the 14 period gets my vote for the trading style employed by the majority of traders. How will Brexit affect the US? RSI does not confirm the new high and this shows weakening momentum. The stock moved to new highs in September-October, but RSI formed lower highs for the bearish divergence. The subsequent breakdown in mid-October confirmed weakening momentum.

A bullish divergence formed in January-March. The bullish divergence formed with eBay moving to new lows in March and RSI holding above its prior low. RSI reflected less downside momentum during the February-March decline.

The mid-March breakout confirmed improving momentum. Divergences tend to be more robust when they form after an overbought or oversold reading. Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend.

A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend - and yet the downtrend continues. These bearish divergences may have warned of a short-term pullback, but there was clearly no major trend reversal. Wilder also considered failure swings as strong indications of an impending reversal.

Failure swings are independent of price action, focusing solely on RSI for signals and ignoring the concept of divergences. A bullish failure swing forms when RSI moves below 30 oversold , bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a move to oversold levels and then a higher low above oversold levels. A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed 70 and then breaks its prior low. It is basically a move to overbought levels, followed by a lower high beneath those levels.

In Technical Analysis for the Trading Professional , Constance Brown suggests that oscillators do not travel between 0 and This also happens to be the name of the first chapter. Brown identifies a bull market range and a bear market for RSI. RSI tends to fluctuate between 40 and 90 in a bull market uptrend with the zones acting as support. These ranges may vary depending on RSI parameters, strength of trend and volatility of the underlying security.

RSI surged above 70 in late and then moved into its bull market range There was one overshoot below 40 in July , but RSI held the zone at least five times from January until October green arrows. In fact, notice that pullbacks to this zone provided low risk entry points to participate in the uptrend. On the flip side, RSI tends to fluctuate between 10 and 60 in a bear market downtrend with the zone acting as resistance.

RSI moved to 30 in March to signal the start of a bear range. The zone subsequently marked resistance until a breakout in December. Short-term traders should prefer shorter periods while long-term traders should gravitate towards longer periods.

However, generally, the best edges are found with timeframes between 2 to 6. All this can be a little confusing. The RSI uses data from previous trading sessions to come to a reasonably accurate conclusion of the stock being overbought or oversold.

When you decrease the timeframe of the RSI, the index has fewer data to draw its conclusions from. As such, the chart becomes more sensitive as you continue to decrease the periods. Conversely, increasing the timeframe for RSI increases the amount of data that is factored into the calculation of the index. Because of this, the data becomes less sensitive and there are fewer signals for you to base your trade upon.

You might be wondering why anyone would want a longer RSI timeframe. Well, not quite. Although shorter periods tend to generate more signals, they are less reliable than signals generated by an RSI with a longer period.

A shorter period generates a lot more signals and thus is better for short-term traders. Short-term traders should be able to use the increase in the number of signals to better ascertain the immediate trend of the chart and go long or short based on their findings. Take a look at the chart above. This is an RSI with a timeframe of 14, where the area between the lower and higher thresholds are marked with color.