An Effective Way to Use RSI

What does the RSI tell?

The relative strength index (RSI) is a momentum indicator that measures the speed and magnitude of a stock’s recent price changes. Known as an oscillator, and plotted on a scale from 0 to 100, the RSI tells us whether there is a bullish or bearish momentum relative to the past 14 periods.

Usually, the RSI is considered ‘overbought’ when its value exceeds 70 and ‘oversold’ when its value dips below 30, which are seen as sell and buy signals respectively.

However, it has been observed that the RSI can remain in the overbought or oversold regions for extended periods, challenging its capability as a reversal indicator…

A unique way of using RSI

Calling a stock ‘overbought’ or ‘oversold’ just based on RSI may not be the most ideal. Instead, you can think of the RSI value as the speed of a car 🚗

› When the RSI value oscillates between 30 and 70, the stock is moving at a normal pace (bullish or bearish), just like a car moves on a regular street.

› As soon as the value crosses 70 or dips below 30, the stock picks up momentum (bullish and bearish respectively), just like a car picks up speed on an express highway.

› A better trading strategy would hence be to ride the momentum as long as it exists instead of trying to predict a reversal. For example, you can consider buying when the RSI value of a stock crosses 70 and consider selling when the RSI value breaks the support of 50 and starts moving downward.

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