Is RSI Good for Day Trading?


RSI is one of the most used Technical Indicators you can find on the market today. That said, it has historically been viewed as a tool more usable for swing trading rather than day trading because of the reputation that this indicator has for producing less frequent trading signals. 

RSI is good for day trading, although it has often been an underrated technical Indicator for day trading. The infrequent trades generated by RSI are not an issue as long as the quality of the trades makes up for the infrequency.

In this article, I will take you through:

  • The reasons RSI is good for day trading
  • How to best use RSI indicator for day trading
  • What RSI level would be ideal to buy

Why Is RSI Good for Day Trading?

RSI is good for day trading because it is a reliable tool that gives day traders an idea of future price trends, helps them bring higher profits than traditional approaches, and allows them to find reliable trading signals in both, trending and consolidating markets.

RSI is reliable and excellent in detecting divergences on the market, which would allow traders to adapt faster to the market’s conditions. This tool is also very effective in finding oversaturated areas of the chart, which would enable its users to track better trending market conditions, under which the RSI indicator works wonders.  

While it is true that this tool may sometimes produce less frequent signals and cause lagging, this problem is solved by finding higher-quality trades and simply lowering the time frame of the investment. 

However, this move comes with an increased risk, which would be necessary for more experienced traders to advance their profits and income while working with a more significant number of stocks and assets.

That is why using the RSI indicator for day trading is not a strategy that is often advised to amateur investors, as it needs to be understood and used in a manner that requires experience and deep knowledge of the market.

Another reason why RSI is not the best tool for less experienced investors is that up to a level of profits, there are far easier ways to generate a return from your investment. It is only after a certain point that you will need to advance your trading techniques and make moves like using the RSI indicator in day trading to potentially yield significantly higher returns.

Dynamic RSI indicators also allow traders to find good entry and exit signals in the market, whether trending or consolidating.

Paying close attention to these signals would mean spotting market opportunities quickly, giving traders a chance to purchase or sell a specific investment before anyone else and profiting from this current market condition. This tool could profit in terms of efficiency by being combined with other indicators, like the MACD, to provide a more well-rounded picture of the market.

By choosing the right strategy and RSI indicator settings, an investor gains a better market perspective. This ability will allow them to foresee possible price adjustments and help them make profitable trading decisions accordingly.

It is important to note that setting an appropriate RSI range for overbought and oversold investments is crucial in achieving specific goals that traders require in attaining their pre-set strategy.

How Can I Successfully Use the RSI Indicator for Day Trading?

You can successfully use the RSI indicator for day trading by getting familiarized with the tool and the market itself as much as possible first. Also, pair the RSI with other necessary instruments, and choose the best-suited strategy and the indicator’s ideal settings.

Keep in mind that the tool itself does not guarantee successful investments. You must keep studying strategies that have worked before and test them in the market’s current environment to have the best chance for developing a profitable strategy.

It would be best to learn how to read the RSI indicator, and stocks should be monitored as closely as possible. This will allow you not to miss any possible profitable entry and exit signals.

Pairing the RSI with other tools is also crucial to using the indicator to the best of its abilities and canceling out its limitations (such as not being used independently for conducting a price analysis, calculating the moving average, etc.).

The Best RSI Strategies and Settings for Day Trading

A 14-period RSI is a golden standard that is typically recommended (although this recommended period was tested on swing trading), but depending on what you are specifically trading, other settings can work as well. 

Depending on your investment timeframe, you can choose a better-suited period that balances your desired levels of speed and accuracy. For most day traders, this balance falls between a range of 9 to 14 periods.

Nonetheless, depending on your strategy, a shorter period might be a better fit for your goals, so, coming back to my first point, keep testing until you find the strategy that works best for you.

RSI divergences are another standard method used to identify new trading opportunities. A divergence happens when the indicator starts to reverse before the price. At this point, combining the RSI indicator to calculate exponential moving averages would allow you to forestall the price, almost guaranteeing a successful trade.

What Is a Good RSI Level To Buy?

An asset with an RSI of below 30 would be good to buy. This suggestion is based upon the fact that an RSI level falling in that range would indicate an undervalued asset, making it ideal to buy. Although, according to your goals, you could set a range that would better fit your strategy.

Depending on the RSI indicator level, there are several actions that traders may need to take to benefit from the market’s condition. An RSI indicator above 70 suggests that an asset or market is becoming oversaturated or overvalued, predicting a reversal or corrective price pullback. 

At this point, you aim to sell the asset, which currently is experiencing inflation in value, to maximize your profits before it undergoes a dip in price.

Inversely, an RSI indicator below 30 indicates an undervalued or oversold condition, suggesting that you need to aim to buy the asset that’s currently being sold below value. By doing this, you’re purchasing an investment less than it’s worth, forestalling a subsequent price spike.

Adjusting the range may ultimately increase investment accuracy, as many day traders are using 20 as the oversold level and 80 as the overbought. Although this range will increase your accuracy, it would be less usable, as prices tend to swing to these extremes less than they would 30 and 70, for example, which could cause you to miss some potentially profitable opportunities. 

Doing a risk-reward analysis would come in handy when deciding on your ideal RSI level range. Many investment platforms allow you to set your customized overbought and oversold levels, which would help you experiment to create the best-suited strategy for your investment goals and needs.

Conclusion

Although it is traditionally considered an instrument used by swing traders, the RSI indicator is an excellent untapped potential for day traders as well, despite its less frequent trading signals.

This tool can give investors an idea of future price trends, allowing them to accumulate higher profits than traditional approaches by aiding them in finding accurate signals in trending and consolidating markets simultaneously. 

It is most commonly recommended for traders to use the RSI according to 30 and 70 levels. Having said that, according to your goals, you could set a range that would better fit your strategy.

  1. Day trading: Your dollars at risk. (2005, April 20). SEC.gov. https://www.sec.gov/reportspubs/investor-publications/investorpubsdaytipshtm.html
  2. Technical Analysis: Introduction. (n.d.). Open Computing Facility at UC Berkeley. https://www.ocf.berkeley.edu/~jml/decal/techanalysis.pdf
  3. What is technical analysis? A beginner’s guide. (2021, June 7). University of the People. https://www.uopeople.edu/blog/what-is-technical-analysis-a-beginners-guide/

 

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Welcome To TradeVeda
Welcome To TradeVeda

Navdeep Singh

Navdeep has been an avid trader/investor for the last 10 years and loves to share what he has learned about trading and investments here on TradeVeda. When not managing his personal portfolio or writing for TradeVeda, Navdeep loves to go outdoors on long hikes.

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