Stock Trading Market Strategy - RSI Relative Strength Index

Learn to trade using the RSI (Relative Strength Index) and see your trading profits increase. CSR is one of the most widely used indicators available to traders. This indicator little can be used in various ways, and there will be a look at some of them today. So if you're ready lets get started.

First of all, I think we should give a little 'history of this instrument and a credit to its developer. The Relative Strength Index was introduced by J. Welles Wilder in the June 1978 of Commodities magazine (now called Futures Magazine), and then, it was reintroduced in his book New Concepts in Technical Trading. OK, I think that's enough about the history, I will not bore you. I just thought we should give credit where credit is due. Now, lets get on the good stuff, how can we make money using this handy little momentum indicator.

The index follows the price dynamics as an oscillator which varies between 0 and 100. The index does this by comparing the magnitude of recent gains to a warehouse the size of recent losses. Using this scale of 0 to 100, it is possible to determine the levels of overbought and oversold. Readings above 70 are considered overbought and oversold anything under 30. So how does this help me in trading? If the RSI above 30 is considered bullish for the underlying security. On the other hand, if the RSI falls below 70, is a bearish signal. This means that if the RSI falls below 30 (which means it is oversold) and rises back above 30, could mark a potential entry point. Just remember, this should be used to confirm another buy signal. Do not use it as a buy signal alone.

Then there's my favorite sign, "The RSI divergence." There are two types, the bullish and bearish. A bullish divergence occurs when price makes a lower low and the RSI makes a higher low. A bearish divergence is exactly the opposite, a higher price is high, but RSI makes a lower high. What does this mean? If you see a stock made a lower low but the RSI does not confirm a lower low it is, then get ready for this stock to reverse its trend.

This is only two ways you can use this indicator. There are many others. Learn all you can, never stop educating yourself, and see your profits go through the roof. I hope this article helps. Good luck, and all exchanges may be on the winning side ....