We have just published an RSI study with 910 data points at http://www.tapetactics.com. This is a free site. Howard
What amazes me is that we all discuss these indicators and nobody knows how to use them. I have a guess how about find out who designed the indicator and read there book. P.S. the RSI is a over bought/sold oscillator meaning below 30 look for a reversal and over 80 look for a reversal.
Hell combined with a fast and slow stochastic you might find a system that works. Let's explain stochastic when in the low end of the range the fast cross up through the slow you BUY only when the RSI is below 30. When stochastic is in the top range you SELL when fast crosses down through slow. But only when RSI is 80 or higher.
I like to use the RSI on other indicators as well and not just simply price action. Its serves as a great indicator when a trend is about to exhaust itself so you can fade it as well just a general strength indicator.
I use it by combining three readings, the next day reading, the day two reading from the day before and the day three reading from two days before. The combination gives me an idea of the chances having a higher close. I also use the extreme readings since a low RSI doesn't necessarily imply an immediate up day, likewise an high RSI doesn't necessarily imply an immediate down day.
I view indicators as dynamic not static. To me this means that over bought is 80 sometimes and at others it is 60. The same applies to over sold levels. I often look at the 10 day average of an indicator and from this 10 day level develop over bought and over sold readings.
From what I do and have seen hedgefunds do is you need to have a good understanding of tape reading and some fundamentals then you find a statistical edge to lean on. What I wrote before works 70 % of the time on a five minute chart but that is on paper. That edge combined with a good feel of the instrument you trade works but alone my gut feel or these two indicators don't work. Market makers have orders to lean on as traders we use indicators to lean on. That is our edge. But I think one of the most overlooked thing in trading is that most people never take the time to study supply and demand. A good understanding of orderflow is needed to trade any system successful. The old analyst question of why is this happening is important to make any system work. You need to know why you are trading example volume breakouts. Once you understand the reasons they work and don't you then could make a indicator to give you an edge. If you don't understand why then uncertainty will consume you and you will lack the discipline to follow through on your system. With out the why you are a ordertaker from your system and if the maket orderflow changes example we have a low volume choppy market now. The indicators that show overbought/sold conditions work great and cleanup prints. When we go back into a bull market the momentum indicators will start working again because the institutional investors are going to be looking for liquidity and volume breakouts will work great along with the MACD and moving averages.
I dont want to add fuel to the debate: but I have notice that institutional buying has more PREDICTABILITY than any TA so far.. Just some food for thought
It does. But using a filter that has a statistical edge to lean on gives me more trading opportunities. In the late 90s just putting up 6 stocks on your screen and watching them all day was good enough because money managers shifted all there money to stock funds. The orderflow was plentiful. Now the money is in gold, bonds, CDs anything safe and that makes the stock market thin. Now there aren't many good trading stocks so a filter system just helps you find them. ultimately reading institutional orderflow is the best way. I hate TA but I had to start using it about a year ago. When the bull is back I am going to load 15 large cap stocks and trading them all the time. The big clue is the size of the prints and I don't see a lot of 10k prints driving stocks in any direction.