What is Speed and Velocity in Physics, is Momentum in stock markets.
Any instrument that is traded in financial markets, the price of which is constantly fluctuating, exhibits a speed at which their price moves. Momentum is basically that speed.
Call it strength, intensity, or propensity of movement, momentum measures that. Technical analysis presents several such momentum indicators, that the masters of the subject have devised from time to time.
Among them is the Relative Strength Index or RSI. This indicator is the speedometer of a stock, telling you how strong the stock’s price movement is, up or down.
RSI can be measured in different ways. The simplest of them is derived from the ratio of the average price upside to the average price downside, over the last 14 days/sessions.
We need not manually calculate an indicator, as their formulas are all embedded in software apps that we use for trading.
What is important to understand is what the RSI reading tells you about a stock.
Being an index, RSI can be anywhere between 0 to 100. An RSI over 50 indicates bullishness prevalent in the stock, and that under 50 indicates bearishness.
So what will you look for in a stock if you want to take a long position, or buy? Whether RSI > 50. And if you want to go short, or sell, whether RSI < 50.
RSI has worked for me time and again in my trading experience. It is the indicator I always look at, no matter what trading strategy I’m deploying.
The master of this indicator also said that an RSI > 70 indicates an overbought state of the stock, so the price can reverse and slide down anytime. And an RSI < 30 indicates an oversold state, so the price can reverse upwards anytime.
So perhaps the best time to buy is when RSI is somewhere between 50 and 70, and sell when it is somewhere between 30 and 50.
Too much math? Let’s keep it simple - buy the stock when RSI > 50 or bullish momentum, and sell when RSI < 50 or bearish momentum.
Used correctly in your trading strategy, this indicator can be a life-saving profit churner. Try and test when you’re picking your next stock.
trading #technicalanalysis #relativestrengthindex stocks #financialmarkets
Pro tip: If you’re like me and like to play long, look for RSI crossing 70 from below. What might be overbought in theory, is the identity of a winning stock in practice!
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