This RSI trading strategy (also called a "trading plan") has correctly timed the market 84% of the time since 1920!
Now, the idea of a “plan” is not a foreign concept.
You have a plan to get to work each day, you have a plan to make dinner, you have a plan to call your mom on Mother's Day, right?
But, insanely, 95% of traders don't have any plan whatsoever when it comes to their trading; they are flying blind.
Therefore, in this post, I want to expose you to what a trading plan, called a "strategy", looks like and then go over a simple RSI strategy you can use in your own trading.
A Trading Strategy Is Just a Set of Rules
At their core, trading strategies are just a set of rules.
You might have heard this one before: “Sell in May and Go Away.”
The rules are:
- Sell your stocks May 1st
- Buy them back November 1st
There's what your account would look like had you followed those rules since 1920:
Look at that, this trading strategy works!
To anyone that says the stock market cannot be timed…show them the graph above.
But what’s the problem with the "sell in May and go away" strategy?
It took over 100 years to see meaningful growth.
Do you have 100+ years to roll your nest egg into six-figures?
We want a strategy that gets us there in 10 years!
Hedge Funds Use Trading Strategies and So Should You
With so much money on the line, hedge funds want to know precisely what their odds of making money are.
Trust me; they don’t have some guy in a room blabbering “I think Apple will go up today and I think down tomorrow.”
They use trading strategies to give them exact probabilities of something happening in the future.
Hedge funds have billions of dollars to spend on research and development using the most sophisticated computerized programming in the world.
They have seemingly endless resources at their disposal to crank out profits using tested trading strategies.
Trading Strategies Eliminate Emotions
When the stock market falls like a knife, and you see your account go down 20, 30 even 40% (as in 2008-2009), did it keep you up at night?
Rhetorical question, I know.
But a proven trading strategy can eliminate those fears and anxieties.
Because you know exactly what to do with your money, always.
No more questioning if the market is going to go up or down or wondering if you should be in the market or not.
You are entirely in control because you know the exact probabilities of winning.
Trading Strategies Are All About Probabilities
If you had a coin that you knew would land heads 80% of the time, you would sit around all day betting on heads, right?
Sure, you might lose a few tosses here and there, but over the course of tosses, you would be the winner, not by a little bit but by a huge margin.
This is how trading strategies help you out in the real world.
You know you are going to make money more times than you are going to lose.
The secret is always to do what the strategy tells you to do.
It’s utterly worthless if you don’t execute it.
Building a RSI Trading Strategy
The RSI or “Relative Strength Index” is a standard way to measure price oscillations of stocks.
RSI values of a stock cycle between 0 and 100.
If a stock has been falling for an extended period, it’s RSI value will be close to 0.
And if the price of a stock has been going up for a while, the RSI value will be close to 100.
People interpret the RSI value of stocks as being “overbought” or “oversold.”
The unfortunate thing about using the RSI in investment choices is that the RSI value can stay in the “overbought” or “over-sold” areas for a long time.
This has been the death of many people’s portfolios as they watch a stock that was “oversold” become even more “oversold” as it continues to plummet.
Use Two Different Values in the RSI Trading Strategy
OK, now we’re thinking outside the box.
What if we use one that measures price in the short term: i.e., four days, and another to measure price in the longer term: i.e., nine days?
Then, what if we buy a stock, or the general stock market like the S&P 500, when it has been going down and suddenly rallies higher?
This is called a “momentum rally.”
At the bottom of the financial crisis in March 2009, the stock market was falling seemly to zero and then suddenly on March 10th it started to rally.
What if we look for these two values of RSI to be very low, say less than 40, and then suddenly the RSI value that measures price on a shorter term (the four day one) pops all the way to 70!?
We know we have a serious rally on our hands.
When Do We Sell?
This is the critical half of all investment and trading outcomes.
Sure, you can pick a bottom correctly, but maybe the stock will rally and then start to fall again only for you to lose tons of money.
You MUST know when to sell!
Let’s fall back on our “over-bought” condition from above.
Now, let's just say that if the slower RSI catches up to the faster RSI, we will sell.
Want to know what that gives us for this RSI trading strategy?
Check it out!
This RSI trading strategy has been right 85% of the time trading the S&P 500 since 1960!
And an insane 84% right since 1920 trading the Dow Jones!
Because it is extremely picky about the trades it makes.
It looks for the absolute perfect set ups and then executes without emotion, without fear.
The system knows the probabilities of success and takes the trade automatically.
But it’s up to us to make sure we follow the system.
A trading system is worthless if it is not used.
If you're interested in another super simple stock trading system, that also has crazy winning odds, check out this one.
Building a Trading System With a 84% Win Rate:
- Use two RSI values:
- 4 day RSI (RSI 1)
- 9 day RSI (RSI 2)
- Wait for RSI 1 and RSI 2 to go below 40
- When RSI 1 reaches 70
- When RSI 2 reaches 70