RSI 5 day look back for entry and exits

by Jake
(Thailand)

I have had very positive results using the RSI (Relative Strength Indicator) 5 day look back for entry and exits in my swing trades. The usual default of the RSI is 14 days on most chart settings (ie...Stockcharts.com). For a swing trader with a 2 to 5 day time frame the RSI (14) day look back is inadequate. I know this site advocates using the Williams % indicator to help with entry and exits but I find the RSI (5) to be more "robust". Just my personal choice.

The RSI(5) strategy is simply a timing devise for entry and exit, it is NOT a set up. The entry begins when the RSI (5) is below 30 and starts to move above 30. Once it crosses 30, I enter the stock. 80% of the time I will hold this stock until it crosses above 80. At this time, I sell the stock when it crosses below 80. The other 20% of the time, I sell before it gets to 80 because I can see from the chart (area of resistance) that it probably won't get to 80 so I just sell the stock when it hits resistance.

By the way, I do not use trailing stops. I use the RSI (5) 80 rule or sell when the stock hits a resistance price area. Also, I will usually sell the stock if it goes up 4 straight days in a row or goes up 10% in two days. I do not like to give back profits and so I am not willing to allow the stock to retrace any price that I feel will invalidate my risk/reward ratio.

Of course, I have my 2% stop loss in the trading plan when I enter and use the money managment sizing concept advocated in this site as well.

If anyone is interested, I will be glad to write up my swing trade set up for you to evaluate. In the meantime, I recommend trying the RSI(5) strategy for entries and exits. It can also be used as a filter or confirmation signal of the swing trade pullbacks.

Best of trading.

Jake
Thailand

Comments for
RSI 5 day look back for entry and exits

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Oct 27, 2008

Response to Khan's comment
by: Jake

Hello Khan
I use 5 days as my time frame. That is, I look back over the last trading week (5 days in a row) for any set-ups. I will also analyze the longer trend using the 20 MA, 50MA and 200 day MA to make sure I stay on the right side of the longer trend. Then, when I enter, I use the 15 minute chart to give me some safe areas (lower risk) to help my risk/reward ratio. Anyway, to answer your question, I use 5 days as my time frame for trades.

Right now I only trade on the short side using ETFs such as QID and SDS. No long trades at all. Stay on the dominant side of the trend.

Wait for the RSI(5) pulls down under 40 if possible but recently, with such a strong downtend, the pullbacks aren't so strong and I am taking RSI(5) under 50 as entry signals if they hook up on the day of entry.

Good luck
Jake

Oct 24, 2008

RSI (5)
by: Anonymous

Jake
RSI (5) % differ with time frame. would you please suggest what time frame you use?
Thanks
Khan

May 22, 2008

Stop Loss Swing Exit (Requested by Lou)
by: Jake

I believe that consistently successful swing trades are based on 80% psychological factors, 10% system/method, and 10% luck.

The pychology of an entry is 80% hope and 20% apprehension. The psychology of an exit is 80% regret and 20% relief.

With this model as my meta-framework, my exits are based on making exit decisions that minimize regret. Regret comes in three forms:
1) Regret that I exited too early and left money on the table (the stock goes up without me).
2) Regret that I exited too late and the market took back some or all of my profits.
3) Regret that I took the trade in the first place and have an immediate loss of capital (ie..stop-loss is hit).

I have two swing trade exits; a stop-loss exit and a profit-taking exit.

Stop-Loss Exit (long trade): This procedure is fairly mechanical. The Stop-Loss is a price which, when penetrated by the close of the previous day, violates the assumption of my entry.

There are two parts to the stop-loss exit:

Part 1: The Signal. The signal is the close of the previous day. If this close is beneath the price that violates the trade then a sell signal is registered in my trade log. The stop-loss price can be any logical marker on the chart depending on the time frame I am trading such as a moving average (10 day, 20 day, 30 day,), a price congestion area, the lowest bar of X days, it doesn't matter where I place my stop-loss price as long as it makes sense via the chart.

Part 2: After the first hour of trading the next day after the signal was triggered, if the stock continues to go down beneath my stop-loss price then I quickly sell the stock.

If instead, the stock whipsaws back above the stop-loss intraday and holds up at the closing, then I hold for another day. I stay with the loss until the stop-loss is violated at both the close and the next day after the first hour of trading.

My position size is such that my risk never exceeds my regret loss amount.

Rule 1: I never lower my stop below the original stop-loss price I set at the entry.
Rule 2: I never second guess my stop loss sell decision.
Rule 3: I wait for the signal first (close of previous day) before I make the stop loss sell decision the next day after the first hour of trading.
Rule 4: I know my Regret number (amount of risk) and never exceed that amount.
Rule 5: In case of a catastophic maximum negative price excursion against me (usually 10% or more) intraday, I always sell first, ask questions later.

I will explain my profit-taking exit in another comment on this thread tomorrow.

Jake
Thailand

May 21, 2008

excellent!
by: Lou

love the tips, thank you.
would very much like to hear your detailed explanation on the way you go about the other half of the trade (exit).
thanks again,
Lou

May 18, 2008

Nice System!
by: Craig

Hi Jake,

Thank you for posting a very detailed explanation of your trading system. I know a lot of traders will really appreciate your contribution!

May 12, 2008

My Swing Set Up (requested by Alvan)
by: Jake

My swing trades only use three pieces of data: price, volume, and time. Absolutely no fundamental information at all.

Filter #1: Price is above $15 and average volume (90 days) is above 20,000 shares traded daily.

Filter #2: Price is above simple moving average (30).

Filter #3: On Balance Volume has been increasing for the last 30 days.

Filter #4: RSI(5) is below 70.

Filter #5: The price has been decreasing for at least 1 day (I prefer 3 to 4 days) prior to entry.

Filter #6: The stop-loss area (exit) must be within 2% of the entry price. The chart must offer me an easily recognizable and identifiable exit (ie..support area, 10 day MA, 30 day MA, flags and pennant patterns are best). I look for rising bottoms, symetrical rising trends, higher highs and higher lows. This is done with visual observation of the chart in multiple time frames.

From these 6 filters I usually have a list of 50 to 100 stocks in my watch list for the trading day. Takes me about an hour per day.

After the first hour of the trading day (10:30am) I load up my watch list in real time. I cross off any stocks that are red (going down). I cross off any stocks that are up more than 2% from yesterday's close (too high). This usually leaves me with about 15 to 30 names that are tradeable that day. They are in my "sweet spot" with a justificable risk/reward potential.

Filter #7: I check each of the 15 to 30 names on my list by sector and industry. I cross off any names whose sectors and industry are not rising and beating the S&P 500 within multiple time frames (1 week, 1 month, 2 month) Now I might have 10 to 15 names.

I take the 10 to 15 names and note duplication of industries within these names. I compare each stock against the ones in the same industry by relative strength within multiple time frames (1 week, 1 month, 2 months).

I buy the strongest name in that industry. Once I enter the stock I never exit the same day.

Remember, this is only half the trade, the entry. The exits are much more exasperating, difficult, and emotional. If you have an interest in this subject please let me know and I will explain that piece of the trade to you. Otherwise, I hope you might gleen some ideas from my above contribution.

Enjoy Your Trading
Jake
Thailand

May 12, 2008

RSI 5
by: Anonymous

Jake, I would be interested in learning your swing trade system. I would be most appreciative if you can send it, and would be happy to share some observations I have about the RSI 5.
Alvan

May 09, 2008

RSI in Swing vs Trend Following
by: Anonymous

I have always used RSI with a shorter setting of 3-5 periods for timing swing trade entries and exits in much the way you do.

I found using slightly longer periods of 7-9 periods will keep you in a trend following trade longer.

One should decide in advance what type of trade it will be (swing or trend). Swing has a limited return and a target whereas a true trend trade is absolute.

May 03, 2008

Interesting
by: Vijai

Interesting but good. I do use RSI but your strategy is new but sounds logical. I would check it out. But is 30 and 80 are SMA's right..

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