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RSI Stock Trading Strategies



RSI Indicator Stock Trading Strategy

RSI or RSI is one of the most popular stock indicator used in stock trading. It is an oscillator stock indicator which oscillates between 0 -100. This a stock trend following stock indicator. It indicates the strength of the stock trend, values above 50 indicate a bullish stock trend while values below 50 indicate bearish Stock trend.


RSI Stock Indicator Measures Momentum of a Stock Trend.

The center-line for the RSI is 50 stock indicator, crossover of the center-line indicate shifts from bullish to bearish stock trend and vice versa.


Above 50, the buyers have greater momentum than the sellers and stocks price on the stock chart will keep going up as long as this RSI stock indicator stays above 50.


Below 50, the sellers have greater momentum than the buyers and stocks price on the stock chart will keep going downwards as long as RSI stock indicator stays below 50.

How to Trade Stock with RSI Stock Indicator

RSI Stocks Indicator - How to Trade Stock with RSI Stocks Trading Indicator



In the stocks trading example above, when the stock indicator is below 50, the stocks price kept moving in a downward stocks trend. The stocks price continues to move down as long as RSI indicator was below 50. When the RSI stock indicator moved above 50 it showed that the momentum had changed from sell to buy and that the downward stock trend had ended.


When the RSI stock indicator moved to above 50 the stocks price started to move upwards and the stock trend changed from bearish to bullish. The stock chart stocks price continued to move upwards and the RSI indicator remained above 50 afterwards.


From the stocks trading example above, when the stock trend was bullish sometimes the RSI would turn downwards but it would not go below 50, this shows that these temporary moves are just retracements because during all these time the stocks price stock trend was generally upwards. As long as RSI indicator does not move to below 50 the current stock trend remains intact. This is the reason the 50 center line mark is used to demarcate the signal between bullish and bearish stock signals.


The RSI stock indicator uses 14 day period as the default period, this is the period recommended by J Welles Wilders when he introduced it. Other common periods used by Stock traders are the 9 and 25 day moving average.


The RSI indicator period used depends on the stocks trading chart time frame you are using to trade, if you are using day stocks trading chart time frame the 14 period will represent 14 days, while if you use 1 hour stocks trading chart time frame the 14 period will represent 14 hours. For our stocks trading example we shall use 14 day moving average, but for your trading you can substitute the day period with the chart time frame you are stock trading with.


To Calculate RSI Stock Indicator:

  • The number of days that a stock market is up is compared to the number of days that the stocks trading market is down in a given time period.

  • The numerator in the basic formula is an average of all the stock trading sessions that finished with an upward stocks price change.

  • The denominator is an average of all the down stock trading sessions closes for that period.

  • The average for the down days are calculated as absolute numbers.

  • The Initial RSI is then turned into an oscillator.


Sometimes very large up or down movement in stocks price in a single stock trading session stocks price period may skew the calculation of the RSI average and produce a false stock signal - whipsaw signal - in the form of a spike.


RSI Center-line: The center-line for this stock indicator is 50. A value above 50 implies that the stocks trading market stock trend is in a bullish phase as average gains are greater than average losses. Values below 50 indicate a bearish phase in the stocks trading market stock prices are generally closing lower than where they opened.


Overbought and Oversold Levels: Wilder set the RSI overbought and oversold levels at which the stocks trading market moves are overextended at 70 and 30.

 

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