You may know what RSI Indicator is.
You may know that RSI is a very popular and widely used indicator.
But do you know how to use it properly in live trading?
I don’t know what you are thinking.
But I can say that most people don’t know how to use it properly.
Most people know RSI is above 70 means over-bought and below 30 means over-sold of the stock.
But you may know a lot more by reading RSI values than overbought or oversold.
In this post, I will discuss this in detail so that you can read RSI levels far better than others.
So, let’s start.
First, I want to say that you should remember one important thing the use of RSI in the ranging or sideways market is different, and in the trending market is different.
So, before analyzing a chart based on RSI, first, you have to know the market conditions.
You have to know if the stock is in a sideways move or in a trending move.
If you make mistake to read the market conditions, you will make mistake to analyze the chart based on RSI.
So, you should be very careful about this.
What is RSI or Relative Strength Index?
RSI is a price following oscillator.
It majors the relative strength of the stock.
RSI oscillates between 0 to 100 levels.
It’s important levels are 70, 60, 50, 40 & 30.
RSI is mainly used for checking the momentum of stock and for checking oversold, and overbought.
14-day RSI is very popular among traders.
What does the RSI tell you?
You may use RSI to know
i) Overbought & Oversold:
When RSI is above 70 levels, the stock is considered overbought.
And when RSI is below the 30 levels, the stock is considered oversold.
Here is an example of overbought & oversold.
ii) Overall Trend Direction:
RSI tells us whether the stock is up trending or trending down or in a sideways move.
When RSI remains above 60, the stock shows an overall bullish trend.
When RSI remains below 40, the stock is in a bearish trend or in a downtrend.
And when RSI stays between 40 to 60, the price will be in the sideways zone.
iii) Early Entry and Exit using RSI indicator:
You can use RSI to get early entry and exit signals by using RSI Divergence.
RSI Divergence is a very strong signal with 95% accuracy if you know how to use it properly.
Price was increasing rapidly but RSI was moving down i.e RSI was indicating early the price may change its direction shortly.
Another day I will discuss how to take a trade based on RSI Divergence.
- iv) Momentum:
RSI is also used to know momentum.
RSI can indicate an increase in momentum in a trending market by remaining above or below a certain level for a long time.
In a ranging market, when RSI takes support at 30, it gives a buying opportunity.
But in a trending market, you should not try to buy the bottom as RSI can remain below 30 for a long period of time.
And in this situation, we do not get a chance to exit the trade on the rising of RSI. We can get stuck in a position for a long time and can face a huge loss.
Conclusion:
RSI is a very useful tool. You have to know properly how to use it in the trending and sideways markets.
But like other indicators, RSI also gives false signals.
So, price analysis is still needed with the use of RSI.