How to Trade Stocks Using the RSI Indicator

The RSI indicator is an oscillator that displays the speed and magnitude of changes in price. It measures price movements over time by computing the ratio of higher and lower closes. It can also show trend direction. RSI values are higher when a stock has a higher number of positive changes than if it has a lower number of positive changes. This indicator helps traders to detect trend reversals early. It has been a popular indicator for traders since its inception.

The RSI can also be used to determine divergence and convergence. Divergence happens when the RSI line moves in opposite directions. If the price makes higher highs than the indicator, this implies a rise in the price. Similarly, if the RSI reaches lower highs, the trend in that direction is declining. This divergence can be beneficial for traders aiming to predict the direction of future price movements.

The RSI indicator is usually set at fourteen periods. However, traders can change the settings by adjusting the look-back period. The seven-day RSI is more sensitive to price movements than the 21-day RSI. Traders using short-term trading setups can also adjust the RSI indicator by adjusting the values to consider oversold and overbought levels of twenty and 80 respectively.

RSI readings should also be adjusted according to the trend. When the RSI reaches 70, the market is in a bearish trend. During an uptrend, RSI readings should be above 30. The RSI indicator may reach 70 in a short period, but often hits 30. Therefore, traders can adjust the settings of RSI to determine the strength of a trend and detect potential reversals.

RSI is most commonly used on a 14-day timeframe. The values range from zero to 100 and high and low levels are usually at 70 and 30 respectively. For a longer-term outlook, a higher RSI will indicate more momentum. If you trade stocks on a weekly or monthly basis, you can use the RSI on a daily or hourly chart. However, if you trade only once a day, this indicator can make you lose money.

In addition to being a popular tool for day trading, RSI can also be used as a signal for swing trading. By trading along with a trend, you can increase your winnings significantly. The stronger the trend, the less likely it is to turn around. In this way, RSI trading signals are extremely useful for traders who prefer to capture swings in the market. The RSI indicator will alert you to when the trend is changing.

An RSI indicator will display a ribbon when it is bullish and a crossbar when it is bearish. RSI indicator is used along with a short and long term moving average to show the trend in the market. If the RSI indicator crosses the 70 level, it indicates an overbought situation. Once the indicator crosses below the 70 level, the signal is considered to be overbought.