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http://www.financial-spread-betting.com/ccount/click.php?id=95RSI Indicator Trading Strategy, Part 1
http://www.financial-spread-betting.com/course/relative-strength-index.html PLEASE LIKE AND SHARE THIS VIDEO SO WE CAN DO MORE! How To Trade With Relative Strength Index. The RSI indicator is sometimes taken as a 'buy signal' when its oversold and as a 'sell signal' when they've overbought. But is this how it works?
RSI Reveals Overbought and Oversold. How to profit from using the RSI (Relative Strength Index)? In trading, we often look for an indication that a stock is “overbought” or “oversold”. These terms are used to describe when the market is being too enthusiastic, pushing the price up higher than it merits or lower than it deserves. If you find this, you can expect the price to come back a little to find a balanced position, and place a trade appropriately.
One of the charting tools we can use to look for this is called the RSI, or the Relative Strength Index. It’s common in trading to talk about relative strength when you compare a stock with others in the same sector. But don’t get confused, the RSI has nothing to do with this. It is a measure of the current strength of the stock relative to itself looking back over a number of time periods, commonly 14 days.
This means that the RSI is a measure of the price momentum, also called a momentum indicator. It also functions as an oscillator. Oscillators, which are usually plotted below the price chart, simply oscillate between two values, nominally 0% and 100%. In practice, they don’t go much lower than 20% or higher than 80%, and often 30% and 70% are considered boundary values that indicate a change in sentiment.
Considering the RSI, it is common to say that the stock is overbought when the RSI is above 70% and oversold when it’s below 30%. While the RSI may well be above 70% if the stock is overbought, this approach is a little too simple. If the stock is trending upwards, the RSI may hit 70% and stay there with never a trace of the stock price adjusting from an overbought condition.
To use the RSI effectively as an indicator of overbought and oversold conditions, you want to look for a price currently oscillating in a range of values, sometimes called a trendless state, rather than in a trend. From looking at sample charts, you can see that when the RSI goes above 70%, it is often followed by a price move back down from the overbought state.
Similarly, as long as you’re not in a downtrend, when the RSI goes below 30% it may well indicate an oversold state, and you can expect the price to come back up when the market evens out. Note that the values of 70% and 30% are not hard and fast, and can vary according to the market and the particular security you are trading. For instance the indicator may work better with 80% and 20%, or 75% and 25%.
On the assumption that traders are in a trading market rather than a trending market, they can observe the following behaviours of the RSI:
- If the index rises above 70, an intermediate top is usually imminent, according to the concept behind the RSI
- If it dips below 30, they may expect an intermediate bottom
Reversal of a rally is very profitable when the index peaks above 70, falls, recovers, and then fails to rise to its former level before heading downwards
- Reversal of a selloff is signalled by the inverse pattern taking place around the 30% level. The index bottoms below this point, rises, and the returns down again, but not as far as before
Critical buy and sell points can be determined during one of the RSI reversal patterns just mentioned:
- The sell point on a rally reversal pattern is the value at which the index begins its upward recovery. An actual sell signal is given when the index once again passes this point on its second time down.
- Conversely a buy signal occurs when the index breaks above the first downturn point established in the downtrend reversal pattern discussed above
The best way to learn how to use the RSI is to go back over some previous charts and observe how it reacts to changes in price. Look for places where the RSI reaches an extreme value, and see how the market continued from those points. This will give you a sense of how useful the RSI can be. It is one of the mainstays of many traders.
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