Hi,
Technical indicators are the core of technical analysis, which helps in analyzing the price movements of a particular stock on technical charts.
Technical indicators can are grouped into the trend, volatility, volume, and momentum indicators.
Momentum indicators are those indicators which measure the speed of the change in the prices.
Relative Strength Index or RSI belongs to this group of momentum indicators.
RSI was developed by J. Welles Wilder for measuring a change in the price momentum. It measures the difference in the prices to indicate whether the stock is in the overbought or oversold region.
The default period of RSI is 14 periods, but a trader can adjust the period according to his trading pattern.
One should note here that period less than 14 days usually generate many entry and exit signals which may be false in some cases. However, the signals generated by 14 periods RSI are more genuine as compared to 7 periods RSI.
Now let us understand how can we enter and exit the trade using RSI:
Overbought, and oversold regions.
These are the regions where the price has reached their extreme levels and may reverse from these levels.
RSI indicates the traders if any reversals are going to take place. RSI moves from 0 to 100. 0 – 30 is considered as the oversold zone, and 70 – 100 is considered as the overbought zone.
One should enter the stock when RSI starts moving from the oversold region to the overbought region means enter the stock when RSI crosses 30 from below and moves towards 70.
One should exit the stock when it enters the overbought zone i.e., above 70, as shown in the diagram below:
The 50 line
The 50 lines in RSI also can be used for indicating the price direction.
When the price is above mid 50 lines, then it indicates that the price is in a bullish phase and when it is below mid 50 lines, then it indicated that it is in the bearish phase.
One can enter the stock when RSI crosses 50 from below and exit the stock when RSI crosses 50 from above.
Undoubtedly, the most challenging part of trading is to find profitable entry and exit levels. A wrong entry or exit level can lead to a poor trade or an unprofitable trade.
As mentioned in the video, RSI is a useful momentum indicator which helps in making a better entry or exit decisions. However, you should use RSI indicator with other technical indicators, or candlestick patterns confirm the signals generated by RSI. This will give ensure double confirmation to your trade.
Thank you for watching the video!
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