The next strategy useful in performing swing trades is a combination of two technical indicators RSI and Stochastics.
We can capture price swings with the help of RSI and Stochastic Indicators. Herein, we will set the default RSI to 14 and Slow stochastics to (14,21,14)
Buy conditions –
a)Stochastics - %K (Blue Line) crosses %D line below 30 and not crisscrossed and %K above %D
b)RSI crossing 50 upwards
c)Keep a minimum Risk Reward Ratio of 1:2 – 1:4 as per market conditions
d)Book partial profits when the target is achieved and keep trailing stop losses
Sell conditions -
a)%K (Blue line) crosses %D line below 70 and not crisscrossed and %K below %D
b)RSI crossing 50 downwards
c)Keep a minimum Risk Reward Ratio of 1:2 – 1:4 as per market conditions
d)Book partial profits when the target is achieved and keep trailing stop losses
The above price chart of ICICI Bank (NSE: ICICIBANK) shows us the power of this strategy. As evident, the stochastic crossover signal was generated in advance and the RSI further confirmed the buy signal.
The stock rallied from lows of ₹557 to hit ₹650 in just a matter of a couple of months.Although swing trading strategies are held only for a couple of weeks, they can be held longer provided the trade is already profitable. This allows the profits to run and at the same partial profit booking with trailing stop losses ensures that the profits are locked as well.
Many traders adopt to capture a price swing with the combination of moving average, price action and RSI indicator.
Strategy Name: RSI Mean Reversion strategy- The RSI is set to 2 periods by default.
a)Price Close > 200 SMA
b)RSI (2) <15
c)If the condition is met, then enter at 1% limit order – i.e. if the stock is at ₹100, place a limit order 1% below CMP. In this case, place a buy limit order at ₹99
d)Scale in if the stock is more than 1% below the close, the next day- add to your positions if the stock is available at less than ₹98
(As we are catching a falling knife, it's always better to scale to smooth your equity curve)
e)Keep 1.5x ATR (Average True Range) as your stop-loss and book profits minimum 3 times the ATR or higher.
Notice the momentum on all the three occasions when the stock met our trade criteria.
Did you like this unit?
34 1
FAQs
Relative strength index was designed to measure the speed of price movements. The stochastic oscillator formula works best when the market is trading in consistent ranges. RSI is generally more useful in trending markets and stochastics are more useful in sideways or choppy markets.
What is the best indicator to combine with stochastic RSI? ›
Some of the best technical indicators to pair with stochastic are moving average crossovers, moving average convergence divergence (MACD), and relative strength index (RSI).
What is stochastic 14 3 3? ›
Stochastic (14, 3, 3) (STOCH)
Stochastic Oscillator 14 3 3 (STOCH) is a range bound momentum oscillator. The Stochastic 14 3 3 indicator is designed to display the location of the close compared to the high/low range over a user defined number of periods.
Why RSI is not a good indicator? ›
The relative strength indicator is not as reliable in trending markets as it is in trading ranges. In fact, most traders understand that the signals given by the RSI in strong upward or downward trends often can be false.
Which is better stochastic RSI or MACD? ›
Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.
What are the 2 lines in Stochastic RSI? ›
Stochastic oscillators display two lines: %K, and %D. The %K line compares the lowest low and the highest high of a given period to define a price range, then displays the last closing price as a percentage of this range. The %D line is a moving average of %K.
Which timeframe is best for Stochastic RSI? ›
The default settings for the StochRSI indicator are as follows. K= 3, D = 3, RSI = 14, and Stochastic Length= 14. These default settings work well for 15 15-minute timeframes and above. Change your Stochastic Length to 8 for a smaller timeframe.
How reliable is stochastic RSI? ›
For a non-trending instrument, Stochastics proves more reliable. While both RSI and Stochastics are useful in most markets, each has its own specialty. As with all technical indicators, multiple indicators give more valid signals than individual indicators.
Is stochastic RSI leading or lagging? ›
The stochastic oscillator is mainly used to highlight when the price may be overextended and could reverse. In this capacity, it acts as a leading indicator.
What is the best stochastic setup? ›
The default settings are 5, 3, 3. Other commonly used settings for Stochastics include 14, 3, 3 and 21, 5, 5. Stochastics is often referred to as Fast Stochastics with a setting of 5, 4, Slow Stochastics with a setting of 14, 3 and Full Stochastics with the settings of 14, 3, 3.
Short (Selling) Rules
- the price must be trading below the Supertrend line.
- check to see if the Stochastic indicator crosses the 80 level or touches it.
- if the above two conditions are met, initiate a sell order 1-2 pips below the candle.
- place your stop loss 1 pip above the Supertrend line.
- aim for 10 pips profit target.
For a stochastic oscillator, %K is the current price of the security, shown as a percentage of the difference between its highest and lowest point over the time the oscillator is being used. %D is a 3-day average of %K. This shows whether the current trend is continuing or changing.
What are the blue red lines in stochastic RSI? ›
The Stochastic is scaled from 0 to 100. When the Stochastic lines are above 80 (the red dotted line in the chart above), then it means the market is overbought. When the Stochastic lines are below 20 (the blue dotted line), then it means that the market is possibly oversold.
Is RSI faster than stochastic? ›
RSI is a derivative of price. Meanwhile, StochRSI is derivative of RSI itself, or a second derivative of price. One of the key differences is how quickly the indicators move. StochRSI moves very quickly from overbought to oversold, or vice versa, while the RSI is a much slower moving indicator.
Is RSI the most reliable indicator? ›
False signals: The RSI is a leading indicator, designed to potentially get you into a profitable trade earlier than lagging indicators. However, leading indicators are less reliable and can often produce false signals. This is because not every change in momentum means price will change direction.
Why the RSI is the best indicator? ›
The RSI is the best indicator to complement or qualify the signals delivered by the RVI, especially in trending markets. For instance, if the market is in an uptrend and the RVI delivers a bearish divergence signal (prices go higher whereas RVI goes lower).
