Everyone who wants to learn how to day trade asks me where the best place is to start…
I always tell traders to transition slowly from swing to day trading and, more importantly, to use the same strategy so they’re familiar with the basic techniques.
The last thing you want to do is start day trading with new indicators and methods you’re not used to.
How to Use the RSI Indicator
One of the simplest indicators to use when learning how to day trade is the RSI indicator.
In fact, the RSI helps traders avoid false signals and random market noise better than most oscillators.
In a nutshell, I simply change the look back period from 14 bars to 10. This makes the RSI more dynamic for short-term price swings that occur when actively getting in and out of the market.
If you’d like a longer rundown on how to use the RSI indicator and the minor adjustment I like to make to my charts, click here.
How to Use the RSI Indicator: The Setup
When showing you how to use the RSI indicator in this article, I’ll use stocks. But remember, this strategy also works well with E-mini Futures and forex contracts.
The first thing you need to do is adjust your chart’s time frame to 15 minutes and change the RSI settings from 14 to 10.
After you make those adjustments, find a stock or other market that’s trending in one particular direction for at least a month.
But keep in mind, because you’re day trading, you don’t have to worry about what the stock did two years ago.
You also want to make sure the stock or market you’re tracking enters a period of high volatility. This is the most important part of this strategy because without volatility, it doesn’t work.
Make sure you track stocks that aren’t going through a price consolidation or triangle type of pattern.
Once you figure out which stocks you’d like to trade, keep an eye on them during the first few hours after the opening bell. You should have a daily chart pulled up as you identify your setup to make sure you only take signals in the direction of the trend.
Here’s a good example of what that looks like…
Once the RSI rallied above 80, I began monitoring the stock and waited for the 15-minute bar to end.
I placed a market order roughly 10 seconds before the 15-minute bar came to the end and closed. If you have used a direct access platform with ultra-fast execution, you should be able to do the same.
However, if you use a slower platform, you should place your entry order about one minute before the 15-minute bar that triggered the trade closes.
How to Use the RSI Indicator: Exiting the Trade
Once you successfully enter the trade, you should stay in the position till the end of the trading day, assuming it’s going your way.
I tend to enter a market-on-close order and monitor the stock till the closing bell.
When you enter MOC orders, the broker doesn’t execute your trade at the bell but rather during the closing range.
This is the trading range that occurs during the last few minutes of the closing bell and is typically only a few ticks away from the actual closing price.
The Second Example
The RSI works just as well to the short side as it does the long.
Take a look at this example of IBM Common Stock (NYSE: IBM) setting up for a long trade…
The long-term trend is up and the short-term trend is choppy and range-bound. This is an ideal time to look for short-term overbought and oversold setups.
If the stock has a setup immediately after the opening bell, you’d place a market order just before the first 15-minute bar closes.
It’s important to monitor the market during the first hour of the trading day when learning how to use the RSI indicator because over 80% of all setups occur within that time period.
After your order is filled, you have to place a MOC order so your position is liquidated near the closing bell.
The good news is that you don’t have to manage the position as far as profit targets are concerned with this strategy.
The example below will show you the entire sequence from beginning to end.
The Final Example
Here’s one last example for you before I get into the stop-loss strategy for this method.
You can see in this example how the stock is in a fairly strong uptrend, so we’ll only look for signals going long in this particular case.
Once you get the signal, be patient and wait till the end of the 15-minute bar that gave you the signal to enter the market.
Don’t rush and enter before the entry bar is fully formed.
Always be patient and wait till the end of the day to exit the trade.
The more time you give the trade to work, the higher the odds it moves further in your direction.
This has proven to be the case over the long term, so don’t make any conclusions based on a handful of trades.
Your Stop-Loss Level
No strategy would be complete without having a safety net or a protective-stop level, so learning how to use the RSI indicator is no different.
Your stop-loss level should be $0.05 below the low of the lowest bar of the day if you are going long. If you’re going short, your stop loss is $0.05 above the highest bar of the trading day prior to your entry.
For more on this topic go to: How to Pick the Best Stocks for Day Trading and The Best Indicator to Use When Short-Term Trading Stocks.
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All the best,
Senior Strategist, WealthPress