RSI Indicator: What Is It and How to Use It?

Do you take into account an RSI indicator when checking price graphs? If no, you miss extra arguments in support or against your trading decisions. So, we offer you to learn more about this instrument, how it works and how to implement it in the market analyses depending on the conditions.

So, what is RSI? This abbreviation is used for a relative strength index. This indicator reflects whether a security (or another asset) is oversold or overbought at the current moment or in the recent period.

One can find out the RSI indicator of an asset chosen from a specific graph, which has a form of a broken line. Its readings range from 0 to 100.

How to interpret it? There are two possible situations:

•   If it is lower than 30, that means the asset selected is oversold, hence, you need to close short positions and open long positions.
•   And if the indicator is higher than 70, the asset is overbought. Thus, you should close long positions and open short ones.

Now, let us tell you about the key RSI-based strategies:

1. Wilder’s strategy. According to it, one must buy an asset when the corresponding indicator rises higher than 30 and sell when it drops lower than 70. Thus, one must close a position, when there is a signal to open a deal in the opposite direction. As a result, one always has at least one position opened. But, there is a certain risk of technical flipping. To fix that, one can apply stop-loss and take-profit orders.
2. Connor’s approach. It involves trading the major trend, but after adjusting entry conditions. Namely, one should buy an asset when RSI is in the oversold area and the price exceeds SMA (200). But a trader must also set the period at 2 (by default, it is 14) and signal levels at 10 and 90. For opening a sell order, one must catch a reverse situation. Experts advise applying this scheme for opening buy deals when the market is clearly growing or there is an obvious trend.
3. Watching divergences. Divergence is a situation when the real price differs from the data shown by the indicator. For example, if the price of the asset skyrockets up to the highest possible limits, but it is not reflected by the corresponding RSI indicator, that means the current market trend is rather weak and there is a risk of a reversal.

Also Read: Choosing a Paper Trading App: Benefits and Recommendations

In sum, RSI indicators are a valuable source of additional information about the strength and perspectives of current price trends, which can prompt you when to buy and sell assets at a profit.