RSI indicator is one of the best technical indicators to buy and sell signals for day trading or swing trading stocks. Many traders combine many technical indicators to get the best result. But RSI technical analysi is a unique indicator to get the best result.
Remember that most of the technical indicators work best for day trading or swing trading. Never follow only RSI or other technical indicators for long term investing. Long- term investing style is totally different from trading style.
Some of the widely used technical indicators are:
1. Relative Strength Index (RSI); 2. Moving average; 3. Moving Average Convergence and divergence (MACD); 4. Stochastic Indicator; 5. Bollinger Bands; 6. William % R; 7. Volume; 8. Price Volume Trend; 9. Exponential Moving Average (EMA); 10. Simple Moving Average (SMA)
Above all, relative strength index(RSI) is the best technical indicator which is used as buy and sell signals.
Understanding Relative Strength Index (RSI)
RSI values remains between zero to hundred. But it has three important parts.
RSI value above 70 indicates Over-Bought. Suitable for selling at high price.
RSI value between 30 to 70 indicates Neutral Position. Suitable for waiting to see the next movement.
Question may arise in your mind, what is the formula for RSI calculation?
RSI calculation formula is difficult to memorize and hard to calculate. Fortunately, you don’t need to learn the formula at all. Because all the trading platforms do this calculation by their software. You just need to know the application of the calculation. If you have less ideas about stock market, you should learn stock market basic knowledge.
How to apply RSI Indicator as buy and sell signals?
1. RSI Value Below 30 means Over-Sold
It is the golden sign to buy a stock when its RSI value is less than 30. As sell pressure is excessive for a stock, this stock price has decreased price or downtrend price. But, before putting buying order, you need to think the reverse trend.
By nature, a stock price falls down from 52 week high if its RSI below 30. This is demand and supply mechanism. In this situation, if you know day trading strategies, you can trade trend reversal even in downtrend market. As demand for this stock increased, supply also increased.
At one point, supply exceeds the demand and price begins to fall. When supply starts to increase for any stock, this stock price falls undoubtedly. Hence, you should wait for a perfect time. When downtrend begins to uptrend with large volume, you should buy as early as possible.
2. RSI value above 70 indicates Over-Bought
You should not buy any stock when RSI value crosses over 70 unless any other suitable factors hint to buy. Other factors means any good news, economic condition, uptrend market, healthy financial condition of the company.
Generally, stock price starts to reverse if it reaches near 100. You may day trade this stock, but for short term investing, you need to avoid this stock. Wait for some time, this stock price will downtrend in near future and you can decide to buy when it starts to uptrend again.
You should sell you holding when its RSI value reaches more than 70. Later, you can buy back when dontrend starts for this stock. Just take the profit when your holding touches in targeted profit margin.
3. RSI values between 30 to 70 is neutral signal
Uptrend or downtrend stock has huge opportunity for day trading and swing trading to make profit if you can identify trend at the very beginning. On the other hand, a neutral stock price nature is predictable. Today’s price indicates next day’s price or previous day’s price.
This stock price Increases or decreases in a predictable manner. No opportunity to halt- price increases much in a single day to give the chance of making huge profit. But, this prediction has exception. Everything depends on traders’ psychology.
Example of RSI application
A company, which has minus 700 P/E ratio but is sold at 350. Although this company has no positive earning rather the company has been making gradually huge loss year after year, traders are buying its stock at high rate.This company’s price should be minus 700. What is the matter? Trader psychology. Gamblers interaction makes price higher high. They are making realized gain.
At one stage, general investors start to buy this stock at the top price and cannot sell at the half price. In this situation, you must keep distance from this stock unless you can identify this uptrend movement at the beginning. You should apply some other indicators to take any action.
In Short
Although RSI is one of the best technical indicators, this indicator is not recommended to apply alone. You should apply some other technical indicators such as candlestick chart along with RSI Indicator. More importantly, you must apply both fundamental and technical indicators to figure out when to buy and sell a stock for trading.
Take your time to master both indicators. Remember, stock business is for intelligent people not for average people. It takes huge time to master all the skills to apply the best strategy in perfect time. Once you master, your path will be easy.
Founder of The Financial Ask
