Every day of a trader is like a fight, to win over the price actions and fluctuations that happen in the market.The fight to dominate the market between buyers and sellers decide the trend direction in which the market would be heading in future.
And as an individual investor like you and me, always try to take the side of dominating party.
But won’t it be great if you know who is dominating the market? The buyers or the sellers. And what if you also come to know that who will dominate the market in coming days.
Yes predicting the future with a very definite result and then taking your step in the market will make your money go boom.
RSI can help you in this regard. Relative strength index establishes a graph presenting the trend and its direction. It is basically a line oscillating between values 80 to 20. This looks like as shown in the image below.
You can see that the level of 80 and 20 are marked while the line is oscillating between these two lines.
So this marked levels can give an indication that may help you predict future price trend.
Keep this in mind
- The level of 70: When the graph crosses mark of 70 it means shares are tending towards overbought condition and by the mark 80 you can conclude that it is overbought. This means that market has reached in a condition where no more buyers are left and sellers are going to dominate the market. So, the price is going to lower down changing the trend direction.
- The level of 20: If the graph has reached the mark of 20 then it’s time to enter the market. The trend direction is going to be bullish and buyers will dominate the market.
- The level of 50: If the graph level has crossed the mark of 50 then you can ensure and state that market has to take bullish direction and is going uptrend until the mark of 80 after which the direct may get reversed.
Before looking into the usage of RSI and how can we make money through this indicator let me brief the essential key interpretations that RSI can communicate about the market
1) The time when Stock is in overbought condition: When you find the graph crossing the level of 70 you say that the stock is overbought. So what does that actually mean and what you need to do now?
So basically here at this point buyers are going to settle down and sellers will dominate the market further. But remember it is only the indication.
It may also happen that trend may rise further and then get reversed. Or it may be the case that trend moves sideways. So if you exit at that point you would have to suffer low profits.
What you can do is get prepared and alert. If you have booked the desired amount of profit percentage than its time to leave. Greed here may not help you. Also, confirm trend reversal with other indicators and chart patterns.
2) The time when the stock is in oversold condition: In an oversold condition the graph touches the mark of 20. Here now sellers are done with their part and buyers are going to drive the market. This is the best time for any individual trader to enter the market. You can book profit until the graph reaches the level of 70.
Learn about Stochastic Oscillator here
3) Trend formation signal: Sometimes the chart patterns or other signals show trend formation but very next moment gets reversed. RSI can help you here to confirm trend formation. The graph if crosses the level of 50 means it is going in a bullish direction and will further lead in the bullish direction.
4) Estimates top and bottom: The level of 70 and 20 marks the top and bottom of trend respectively. You need to be very aware of the fact that these are only indications and needs to be confirmed with other signals. The trend may not end up here and may exceed the marked level.
Money management is a crucial part of trading. If you blindly follow the trend signals and keep risking your hard earned money then your wealth will not grow rather start degrading. Become smart investor and use these signals efficiently to book profits.