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 RSI or Relative Strength Index is a valuable and often used indicator, created by developer J Welles Wilder in 1978. This indicator is called a momentum oscillator that measures the momentum and changes of price movements. It is also a valuable tool to confirm the movement of prices and trends, give buy and sell signals to the trader, identify oversold and overbought conditions in the market, and can also give a warning of possible price reversals. The RSI is similar in many ways to the Stochastic in the information it provides the trader.
The default setting J Welles Wilder recommends and most software is pre-set for is the 14 period, but the 9 period and 25-period analysis is also often used by traders as well. Traders can set the settings on any number of periods, but a good thing to remember is that typically, the shorter the period, the more buy/sell signals the trader will see. When levels reach above 70, they are considered overbought, and when they dip below 30 they are considered oversold.
These settings are default settings, but they can be changed a bit to get more information if the trader is inclined to do so. It is not recommended for a new trader to change the levels from the default settings unless they know what they are doing.Even though the RSI has been around since the late 1970s, it has remained a very reliable and well used indicator by traders and has stood the test of time.
There are five ways that RSI can be used to analyze commodities and other securities.
a)Chart Formations– on regular price charts, formations, or chart patterns may not be evident, and the RSI helps to identify them.
b)Support and Resistance– RSI demonstrates support and resistance levels, which in many cases can be clearer to understand and identify than the prices themselves.
c)Divergences– A divergence is not an uncommon thing in the Forex world and happens when prices go higher or lower and doesn’t get affirmed by a new low or high in the RSI itself.
d)Failure Swings– This is when the RSI exceeds a high that was reached previously or falls below a previous low at that moment in time.
e)Tops and Bottoms– When the RSI rises above 70 or falls below 30
Each of the above uses gives the trader different information that can be a valuable asset when deciding the path they should take with the trades they are involved in. Just like with most indicators, RSI works well combined with other indicators to give more in depth information or to even confirm information that is being given by the RSI at any given time.
Nifty RSI Signals
Following Daily chart shows RSI divergence on 29th Feb 2016 where RSI made a shallow depth compared to previous low(on 12th Feb 2016) where Nifty made a new low at 6825. This is a classic example of RSI bullish divergence on Nifty daily chart. Buying Nifty on 1st March after Nifty crossing previous day’s high at 7095 reached over bought zone around 2nd June where Nifty made a high of 8230. Coming to Nifty same chart right now we are in the verge of RSI bearish divergence where Nifty may go down in coming days unless it makes new high on RSI.
Since Wilder invented the RSI in 1978, more information has been gathered and more work done on this valuable indicator, by Constance Brown and her RSI mentor, Andrew Cardwell, making it even easier to understand and more helpful in the market when it comes to reading different trends and overbought and oversold conditions. If you are just getting involved in trading, be sure to learn as much as you can about RSI as well as the other indicators it can be paired with. Most trading software will have RSI and will use default levels, which you can experiment with, but when doing that, be sure you have given yourself some time to use the RSI with the default settings to get the idea of what it tells you and how to read the information given. It is never advisable to use an indicator without the proper knowledge, even basic knowledge, of how it works and what it will tell you about the market.
The RSI is a very simple technical tool that can be used in conjunction with other indicators to make a trading decision and lock in profits in any market. Note here of course that to enter into any position in the forex market it is best to begin at the break of a pivot point as this is the safest place to enter a trade according to my experience in trading the forex. Understanding the RSI can be one step to success in your trading.