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How to trade with RSI indicator

Quick Summary Relative Strength Index:

Wilder RSI is a popular indicator that shows comparative price strength within a single security. 9, 14 and 25 period RSI calculations are most popular. The most widely used method for interpreting the RSI is price/RSI divergence, support/resistance levels and RSI chart formations.

  • Standard period settings for RSI is 14 periods. Which can be applied to any time frame.
  • This indicator compares the average of up and down closes for a specific period of time.
  • The RSI moving above 50 level — uptrend is confirmed. Below 50 — downtrend is confirmed.
  • Relative Strength peaking above 70 level — market is overbought.
  • RSI staying above 70 level — uptrend is running strong.
  • Exiting 70 level — downtrend is underway, or at least a correction down is due. (Opposite for RSI falling below 30.)
  • And trend line breakout – early warning about chart trend line breakout.
  • RSI diverging from price on the chart — an early warning of a possible trend changes.

How to trade with RSI indicator

  • Readings above 70 indicate an overbought market. While readings below 30 indicate an oversold market. However, once RSI advances above 70 it is not yet a signal for an immediate Selling. Since RSI may stay in overbought area for a long-long time. In fact, when a strong uptrend develops, readings above 70 are just a beginning of a great upward move. An opposite is true for a downtrend and readings below 30.
  • In order to enter at the right moment the traders should wait for RSI to leave its overbought/oversold area. For example, when RSI goes above 70. The traders would prepare to Sell. But the actual trade will take place only when RSI crosses down below 70. Opposite true for an oversold RSI: once RSI goes below 30. Traders wait for the indicator to come out of an oversold area and rise above 30 before placing a Buy order.
  • The traders also use 50 level of the RSI indicator. Which separates buying forces from selling forces on the market. Certain trading strategies use RSI 50 level to confirm Long and Short entries by looking at a positioning of the RSI in relation to its 50 level.
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About Dwipen Gogoi

Dwipen Gogoi, MBA (IB and IT) and PGDFT from Pune. (Technical Analyst of AliceBlue) I am a You Tuber, Blogger and doing Technical Analysis last 10 years in Stock, Commodity and Forex Market. i am creating various trading strategies for day traders, swing traders, scalp traders.

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