Tips How to Use RSI Indicator to Take Decisions on Buying and Selling Stocks
August 8, 2018
According to Investopedia.com, the RSI (Relative Strength Index) is a ‘momentum indicator that measures the magnitude of recent price changes to analyze overbrought or oversold conditions’. From this definition, it can be drawn that the RSI is an essential tool that can be used in trading. I shall however not be going deep into discussing RSI here; rather I will be sharing some tips on how you can use the indicator to take stocks buying and selling decisions.
- Using the RSI Formula
Firstly, you need to keep in mind that Relative Strength Index is usually set at 14 trading days. Then using the RSI formula, find the RSI value.
RSI formula = 100 – [100/ (1+ (Average of upward price change/Average of Downward Price Change))]
Obtaining RSI value from 70 and above means that the stocks are being overbrought so, you should consider selling but a value of 30 or below means the stocks are being oversold and then you should make a buying move.
- Watching out for trend direction
Following up on trend direction is another way of determining whether to buy or sell stocks. In a bearish market, an RSI value between 60 and 20 could indicate a strong downward trend while in a bullish market, an RSI level between 40 and 80 could mean a strong upward trend.
- Using divergence with price action
The third tip is on using rsi divergence; this means you will have to look forward to the period where the RSI is on a lower low while the price is making higher highs – this surely, is an uptrend – while a downtrend comes about when there is a lower low on price but same is not attainable with the indicator. Summarily, if there is an uptrend and the RSI keeps getting lower, you should sell the stocks when there is a price break but if it happens in the reverse, you will have to sell the stocks.