How to Use RSI Indicator Signals for Buying and Selling?

Relative Strength Index or RSI indicator is very popular technical analysis indicator all over the world. The reason behind the popularity is basically its very easy to use; also, it is one of the efficient tools to apply in trading strategy. But, sad thing is that most of the people do not know how to use RSI Indicator Signals for Buying and Selling.

There are some key points which indicates bearishness and bullishness.

This post will gradually elaborate the strategic way to use buy and sell signals of RSI, and advantages & disadvantages of using it.

 

How to Use RSI Indicator Signals for Buying and Selling?

Relative Strength Index or RSI is a Momentum Indicator which measures the strength & weakness, or bearishness & bullishness of a stock trend.

Interpretation of Different RSI values 

  • Below 50 Bearish
  • Above 50 Bullish
  • Between 50 & 70 – Bullish
  • Between 70 & 100 Over Bought
  • Below 30 – Over Sold
Relative Strength Index (RSI) - The most important technical indicator in Technical Analysis

Relative Strength Index (RSI) – The Most Important Technical Indicator

Now we know the benchmark numbers. But what do these really mean? Will we follow these numbers blindly? Well, obviously not. There are some other tricks of using Relative Strength Index. I will explain those tricks later. Now we will discuss some very basics of Relative Strength Index. One more thing I need to say now that, memorize these numbers because these are very important.

It is very important that you know how the RSI is calculated. 

Buy and Sell Signals of RSI

When the price of a stock stays below 50 (fifty) but, this really means the stock is in bearish position. But the moment it crosses above 50, it’s in bullish zone 50-70 (Should I make an entry immediately after crossing above 50?). As long as it stays above 50, its in bullish zone. And above 70, the zone is called the overbought position. The overbought position is up to 100.

So, generally, the buying signal starts from 50 (fifty) and ends at the point seventy (70). This is considered as a bullish zone.

RSI Indicator Strategy – Defining the Bullish Zone

Here are some of the tips of using Relative Strength Index. But these are not all. Remember one thing, you can not trade efficiently by only knowing some numbers. If you try, you will be a wrong position which could result misdirection. Using tips:

  • Below 50 – it’s in a bearish zone, so you do not have to do anything other than avoiding(only considering RSI).
  • Above 50 – it’s in bullish zone. Enlist in your watch list, anytime it will give you a buy signal.
  • Between 50 to 70 – The bullish zone, and always safer for making entry.
  • above 70 – It’s overbought zone. Be ready for selling. Anytime you can get a sell signal.

Note: If only RSI is used to trade a stock then it can be called the RSI trading system. But it is recommended that you use it with a combination of the other indicators.

Advantages and Disadvantages of RSI

The Relative Strength Index Advantage

You will have many good sides of using this indicators. This is why it is used widely as a prime trading indicator.

  1. Predictive quality is high
  2. Easy to use as it stays in bounded range
  3. One of the few efficient tools
  4. It is leading, so gives signal within short time

The Relative Strength Index Disadvantage

However, you will also find some problems with relative strength index while using this indicator in trading. Those are described below.

  1. Makes many false signals as it’s a leading one
  2. Finding out a wrong signal is almost impossible
  3. Hard to make decision if not combined with others

In this post, I have explained the basics of Relative Strength Index(RSI). This is one way of using RSI. If followed properly, the decision can be made based on this knowledge. However, there are other ways of using RSI. And obviously, there are also some secrets about it. I will discuss these in my next post on RSI. I hope, you have enjoyed it.


More Reading:

  1. Invest in Dhaka Stock Exchange
  2. Stock Market Basic for Beginners

faizul

Sheikh Faizul Haque, the founder of GotAbout, graduated from North South University, Bangladesh. His major was Finance and Accounting. Faizul has been writing in business blogs since 2013, also has a strong interest in Behavioral Finance, Risk Management, and Portfolio Management.