When trading futures, it’s important to familiarize yourself with technical indicators—measurements that can help you analyze and forecast trends and opportunities in the markets. However, without proper context and experience, it’s possible to misread these measurements and make the wrong decisions. To be successful, it’s critical for traders to know some of the most common mistakes they can make with indicators and how to avoid them.
One of the most popular technical indicators in futures trading is the relative strength index (RSI) indicator. This is a measurement of the speed and chance of price movements in a security, stock, index or commodity. Using the RSI indicator for futures trading can help you identify whether the price of an asset is overbought or oversold and if it’s likely to reverse direction in the near future.
By taking a close look at the RSI in your technical analysis, you can identify trends, spot diverging chart patterns, and help confirm potential support or resistance levels. All these concepts are essential to guiding your trading decision-making process. But unless you know how to read the RSI information correctly, you’re unlikely to derive its full benefit.
Let’s examine some of the most common RSI-related errors that futures traders make and what you can do to avoid making these mistakes.
The Most Common Mistakes Traders Make With RSI
Mistake #1: Relying Too Much on RSI
Often, traders see RSI as the be-all, end-all indicator, and that can put them in a precarious position. Just as meteorologists wouldn’t only look at the barometer when predicting a thunderstorm, futures traders shouldn’t take all their cues from the RSI. By itself, the RSI doesn’t provide clear buy or sell signals, and believing it does can lead you into murky territory.
- Solution: Consider the RSI as just a piece of the greater puzzle. You should also keep an eye on other indicators—such as moving averages, the moving average convergence/divergence (MACD) indicator, and trendlines—to help you overcome false signals from any one indicator and gain clearer more holistic insights into the markets you’re trading.
Mistake #2: Ignoring Overall Market Trends
A rising tide lifts all boats, and that’s important to keep in mind when observing the RSI. The overall trend of the market can have a strong influence on an asset’s RSI. For example, strong market uptrends can move an asset’s RSI in overbought territory quickly, which may cause traders to panic and exit their positions prematurely.
- Solution: Trend analysis should already be part of your strategies, especially when it comes to the RSI. Pay close attention to trends and be prepared to adjust the RSI you’re observing to provide a more accurate assessment. Alternatively, you can use the RSI to identify pullbacks rather than to spot tops and bottoms.
Mistake #3: Misinterpreting Overbought and Oversold Conditions
Many traders think that the RSI represents absolute conditions. For example, they might assume that an RSI below 30 represents an asset that is clearly oversold. On the other end, they might assume that an RSI above 70 means the market is automatically overbought. Based on these misconceptions, traders might jump the gun and place trades at inopportune times. Remember, markets can stay overbought or oversold for quite a while when the market is trending.
- Solution: Rather than interpreting RSI levels as absolute signals for buying or selling, it’s better to think of them as alerts to start thinking about potential setups.
Mistake #4: Using the Same RSI Period for All Markets
One of the most frequent mistakes traders make is assuming they can use the same default period regardless of the market or timeframe. For the most accurate signals, it may be necessary to use different RSI settings.
- Solution: Customize your RSI period based on the specific asset and timeframe you’re trading. Pay attention, because shorter periods can provide more false signals while longer periods may lag behind price movements.
Mistake #5: Ignoring Any Divergences
When the RSI moves in the opposite direction of the price, it could be an indicator of a potential reversal in the works. Unfortunately, traders often ignore or overlook these divergences and find themselves on the losing end.
- Solution: Watch divergences closely, especially when they coincide with other technical signals. For example, if an asset on a downtrend shows a bullish divergence in which the price makes lower lows while the RSI makes higher lows, this could be a sign of a reversal on the horizon.
Let NinjaTrader Help You See More
Watching the RSI closely can help you make better informed choices about your trading by enabling you to spot trends. NinjaTrader provides powerful tools for traders to learn how to use RSI indicators and help make sense of futures trading.
