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Swing Trading

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RSI and Stochastic Strategy

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.

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