V.9:4 (160-162): RSI As An Exit Tool by David Cartwright

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 75 level.