RSI As An Exit Tool
by David Cartwright
Over the past 12 years of futures trading, I have taken a singular approach to the use of the relative
strength index (see sidebar, "RSI"). I have discovered that RSI is unreliable for market entry. For exiting
the market, however, the index can be very impressive. For traders who take multiple contracts in a
futures market, using RSI can be even more dynamic.
It is a common practice for traders to use a trailing stop order to protect profits on positions that are
working in their favor. Many traders will use a simple moving average to locate the area in which to
place a stop-loss order, then place their order under the average and move the stop as the moving average
increases or decreases. That's the technique I use along with RSI to exit positions.
Figure 1 is a chart of the Treasury bond market in a sideways pattern. I only use multiple contracts in the
futures market, which allows me to be flexible enough to reduce my potential loss while still being able
to participate in the potential profit of the transaction.
Whenever the nine-day RSI rises into the 75 area, I liquidate 10% of my position, or at least one contract.
If the RSI rises into the 80 area I will liquidate 50% of my remaining position, and if the RSI rises into
the 90 area, I will liquidate 90% of my remaining position. These RSI levels have a history of indicating
exhaustion of the buying for the price run. Obviously, the stronger the underlying fundamentals are, the
higher the RSI could get, but even in strong bull markets, runs will tend to play out in regions above the