Using a Modified RSI Indicator For Swing Trading and Day Trading

How To Learn Swing Trading and Day Trading Using Modified RSI Strategy

Many traders who want to know how to learn day trading ask me where to start.

I always tell traders to transition slowly from swing trading to day trading and more importantly to use the same strategy so that you are familiar with the basic techniques.

The last thing you want to do is start day trading with new indicators and methods that you are not familiar with.

The Modified RSI Indicator

One of the simplest indicators to use when learning day trading is the RSI indictor. A few weeks ago I demonstrated how to adjust the settings on the RSI to make it work better for short term and day trading market action.

The RSI is a very solid indicator that tends to avoid false signals and random market noise better than most oscillators.

If you would like to read more information about the modified RSI and the minor adjustment that needs to be made you can read the article by clicking here.

It a nutshell you simply change the look back period from 14 bars to 10 bars, this makes the RSI more dynamic for short term price swings that occur when you actively getting in and out of the market.

The Set Up

I will use stocks this example but this strategy works equally well with E-mini Futures and Forex Contracts.

The first thing you need to adjust your chart's time frame to 15 minutes and change the RSI settings from 14 to 10.

After you made your adjustments, find a stock or other market that's trending in one particular direction for at least 1 month.

Since you are day trading you don't need to worry about what the stock did 2 years ago.

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The Stock Has Been Slowly Selling Off For Over 1 Month

After you start tracking a few different stocks or other markets you want to make sure they enter a period of high volatility.

This is probably the most important part of this strategy because without volatility the strategy does not work.

Make sure you track markets that are not going through a price consolidation or triangle type of patterns.

Once you identify your trading prospects for this strategy, keep an eye on them during the first few hours  of the opening bell.

You should have a daily chart as your identifying your set up to make sure you only take signals in the direction of the trend.

Here is a good example of a trade set up that occurred earlier this week.

Once the RSI rallies above 80 I begin monitoring the stock and wait for the 15 minute bar to end.

I place a market order roughly 10 seconds before the 15 minute bar comes to the end and closes.

If you have use 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 probably place your entry order about 1 minute before the 15 minute bar that triggered the trade closes.

how to learn day trading

Only Short Signals Are Taken Because Google Has Been In A Down Trend For Over 30 Days

Exiting The Trade

Once you successfully entered the trade you should stay in the position till the end of the trading day assuming the position is going your way.

I enter a MOC (Market On Close) order and monitor the stock till the closing bell.

When you enter MOC orders the broker does not execute your trade at the closing bell but 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.

How to learn day trading

You Can See The Entire Trade Sequence In This Example

Second Example

The modified RSI works equally well to the short side and the long side. Take a look at this example of 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 ideal time to look for short term overbought and oversold set ups.

how to learn day trading

Only Long Signals Are Taken When The Trend Is Moving Upwards

The stock has a set up immediately after the opening bell. You would place a market order just before the first 15 minute bar closes.

It's very important to monitor the market during the first hour of the day because over 80 percent of all set ups occur within that time period.

how to learn day trading

The Set Up Occurs Immediately After The Opening Bell

After your order is filled you have to place a MOC order so that your position is liquidated near the closing bell.

You don't have to manage the position as far as profit targets are concerned with this strategy. This example shows you the entire sequence from beginning to end.

how to learn day trading

MOC Exits Provide The Best Profit Potential With This Set Up

Final Example

Here is 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.

Therefore we will only look for signals going long in this particular case.

how to learn day trading

Strong Trend Upwards

Once you get the signal be patient and wait till the end of the 15 minute bar that provided the signal to enter the market. Do not rush and enter before the entry bar is fully formed.

how to learn day trading

The Entry Bar Usually Forms Within The First Hour Of The Trading Day

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 that the trade will go your direction further.

Over the long term this has proven to be the case so don't make conclusions based on a handful of trades.

how to learn day trading

Be Disciplined And Follow The Exit Rules

Your Stop Loss Level

No strategy would be complete without having a safety net or a protective stop level and this one is no exception.

You stop loss level is $0.05 cents below the low of the lowest bar of the day if you are going long and conversely, if you are going long your stop loss is $0.05 cents above the highest bar of the trading day prior to your entry.