subject: Using Relative Strength Index (rsi) To Maximize Stock Trading Profit [print this page] Trading stocks could be easier with the help of technical indicators such as the relative strength index. Popular and simple, this indicator could help traders determine which stock is ripe for buying and which one is facing a possible reversal. Also known as RSI, this indicator can help a trader determine when to buy or sell a stock. This oscillator can likewise help traders do a more profitable trade if it is used alongside other indicators such as moving averages and the movement of the share price itself.
What is RSI?
The relative strength index is a momentum oscillator that measures the strength of a share price compared to its past movements. Developed by J. Welles Wilder, this indicator is plotted on a scale of 0 to 100. Normally, a stock with an RSI of above 50 means that it is in bullish territory, whereas an RSI below 50 could mean that it is in a bearish trend. But aside from this, traders see the RSI as an indicator of which stocks are overbought or oversold.
Overbought and Oversold
Stocks that are overbought would likely correct, while those which are oversold could bounce back. A stock price is deemed overbought when its RSI exceeds 70, while it is said to be oversold if the RSI is below 30. When a stock has been performing extremely well but is nearing the RSI of 70, it could mean that there is an impending correction in the stock's price. As a trader, you could sell by the time the RSI reaches 70 so long as it confirms with the general trend of a stock price. On the other hand, if a stock has been severely beaten down with an RSI of below 30, it could be bound for a bounce back to an uptrend. An oversold stock could mean that it is undervalued. If the RSI starts to bounce back above 30, it could be a wise choice to buy the stock. Understanding what overbought and oversold means could be helpful to a trader to know which stocks could correct and which ones could bounce back.
What Divergence could mean for a Stock?
When the RSI deviates from the trend of the stock price, that stock could reverse its current trend. For instance, if a stock reaches new highs on the chart, but this oscillator does not reach its previous high, it could mean that the current trend could be losing steam and momentum. As such, a trader must be alert for any approaching development. Not all divergences, however, could lead to a complete reversal. A divergence between the stock price and the RSI could indicate that a stock would only correct or retract for a while. If a trader has bought the stock earlier at a lower price, he could buy the stock again when it corrects. As long as the general trend is confirmed by moving averages and other indicators, it could be a good buying opportunity for traders. Using the RSI as a tool in trading could be powerful and helpful in enhancing a stock trader. If used alongside other indicators and the general trend of a stock price, the relative strength index can help a trader make good trades and avoid possible pitfalls.
by: William WL Tan
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