Best of Momentum Strategy to Find Consistent Trend Using RSI

How momentum trading strategy can yield sustainable return

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Relative Strength Index (RSI) introduced by J. Welles Wilder Jr. in his classic book “New Concepts in Technical Trading”. He used RSI as a momentum oscillator to identify reversals in security prices. Momentum strategy basically bets on the continuation of an existing market trend. While it is possible to time reversals using RSI, reversal strategies do not utilize the inherent strengths of the indicator.

Let us understand momentum first. When using Technical analysis for prediction of stock values, few assumptions are made:

• It is assumed that market moves in trends.
• History repeats itself i.e. under similar kinds of inputs the stock values behave in similar manner.
• Prices have tendency to go with the trend rather than against it.

Now, the movement of the prices of the stocks are defined by momentum of stocks and the trends that follow. Momentum reflects the amount of change experienced by the stock price over the previous period.

momentum = close (today) − close (n-days ago)