Intraday trading is a type of trading where traders buy and sell securities within the same day, usually within a few hours or even minutes. Intraday trading can be very profitable, but it requires a good strategy and a lot of discipline. If you are looking for the best intraday trading strategy then, one of the most popular indicators used by intraday traders is the Relative Strength Index (RSI) is for you. In this blog, we will explain what the RSI is, how to use it in intraday trading using the Nifty index as an example, and provide an example with figures.
What is the RSI?
The RSI is a momentum indicator that measures the strength of a security’s price action. It was developed by J. Welles Wilder Jr. and introduced in his book “New Concepts in Technical Trading Systems” in 1978. The RSI is a range-bound oscillator that fluctuates between 0 and 100. The closer the RSI is to 0, the more oversold the security is, and the closer the RSI is to 100, the more overbought the security is.
The RSI is calculated using the following formula:
RSI = 100 — (100 / (1 + RS))
Where RS is the average gain of up periods divided by the average loss of down periods over a certain period. The default period used for the RSI is 14, but traders can adjust this to fit their trading style.
Intraday trading strategy using RSI in Nifty/BankNifty?
Intraday traders use the RSI to identify overbought and oversold conditions in a security. When the RSI is above 70, the security is considered overbought, and when the RSI is below 30, the security is considered oversold. Traders use these levels as signals to enter or exit trades.
Intraday traders also use the RSI to identify divergences between the RSI and the price action of a security. A bullish divergence occurs when the RSI makes a higher low while the price action makes a lower low. This indicates that the momentum is shifting to the upside, and traders may consider buying the security. A bearish divergence occurs when the RSI makes a lower high while the price action makes a higher high. This indicates that the momentum is shifting to the downside, and traders may consider selling the security.
Another way to use the RSI as your intraday trading strategy is to look for price action patterns that coincide with overbought or oversold levels.
For example, a trader may look for a bullish reversal pattern, such as a double bottom or a bullish engulfing candlestick pattern, when the RSI is below 30. This would be a signal to buy the security. Similarly, a trader may look for a bearish reversal pattern, such as a double top or a bearish engulfing candlestick pattern, when the RSI is above 70. This would be a signal to sell the security.
Example of intraday trading with the RSI using Nifty
Let’s take a look at an example of how to use the RSI in intraday trading with the Nifty index. We will use the 5-minute chart of the Nifty index futures.
First, we will set up our RSI indicator on the chart. We will use the default period of 14. The figure shows the chart with the RSI indicator.
As we can see from the figure, the RSI fluctuates between 0 and 100. We will use the overbought level of 70 and the oversold level of 30 to identify potential entry and exit points.
Next, we will look for potential buy signals using the RSI. On the chart, we can see that the Nifty was in a downtrend until around 14:05 pm. The RSI was also in the oversold territory during this time, indicating that the security may be due for a bounce.
If you look there, double bottom patterns are marked in the chart with a morning star candlestick pattern forming as the RSI crosses above 30. This would be a potential buy signal for intraday traders using the RSI.
After the buy signal, the Nifty began to move higher, and if the RSI crossed above 70, indicating that the security may be overbought. Intraday traders who bought the security based on the RSI signal may consider taking profits at this point.
The below figure shows a view of the chart with a double top chart pattern forming as the RSI crossed below 70. This would be a potential sell signal for intraday traders using the RSI.
After the sell signal, the Nifty began to move lower, and the RSI crossed below 30, indicating that the security may be oversold. Intraday traders who sold the security based on the RSI signal may consider taking profits at this point.
Conclusion
The RSI is a popular indicator used by intraday traders to identify overbought and oversold conditions in a security. Intraday traders also use the RSI to identify divergences and price action patterns that coincide with overbought and oversold levels. Intraday traders can adjust the RSI period to fit their trading style and should use other technical indicators and risk management techniques to increase the probability of success.
In the example above, we showed how intraday traders can use the RSI in conjunction with price action patterns to identify potential buy and sell signals in the Nifty index futures. Traders should always remember to do their own analysis and make trading decisions based on their own risk tolerance and trading style.
