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We often get asked what technical indicators we use at The Lincoln List, specifically how we use the Relative Strength Indicator (RSI) in our day to day trading. You will often see on our videos that we have the 10, 20, 50 simple moving averages along with the VWAP on our stock charts.At the bottom of our trading platform (we use ThinkorSwim) we have the RSI. We won’t go into the details on how the RSI is calculated, how the RSI originated, etc. But ,we will go into details on how we use it in our trade room on a daily basis.
First, let’s get one thing clear, while we do have technical indicators on our platform, we never make any trade solely based off of a technical indicator. We simply use them as guides to find areas where other traders might use them as support and resistance. The perfect example would be the VWAP. We also use them as a guide to identify the stock’s overall trend, both short and long term.
RSI as an Overbought and Oversold Indicator
So how do we use the RSI? We use it as an overbought and oversold indicator and nothing else. Specifically we use the RSI to accompany our parabolic shorts and washout buys. The standard RSI settings tells us that a stock is overbought when a stock has an RSI above 70. At the same time, a stock is oversold when a stock has an RSI below 30. But what if screen and screen for the extremes. In our trade room, we look for stocks that have an RSI above 90 and below 10. Yes these stocks exist and depending on the market environment, multiple opportunities can present themselves in a single day!!!
The parabolic short is probably our favorite type of trade and there was a period this year where that’s pretty much all we traded. It is our bread and butter and a set up that has made our members a lot of money. A nice little feature about parabolic/high RSI short is that many of these plays occur in the first hour of trading. So if you are able to nail a couple of these out of the open, you can call it a day early or take it easy the rest of the day. Below is a video straight from our Trading As An Art DVD:
Finally, and this is ideal for those who work full time or want a slower pace is that the high RSI parabolic short is also applicable to longer time frames such as a daily chart. This is the same strategy we use for our swing trading room which currently has more than a 80% win rate.