Stock Market Trading Strategy - RSI Relative Strength Index

By Chris F Jones

Learn to trade using the RSI (Relative Strength Index) and see your trading profits increase. The RSI is one of the most used indicators available to traders. This little indicator can be used in several ways, and we will take a look at a few of them today. So, if you're ready lets get started.
First off, I guess we should give a little background of this tool and credit to it's developer. The Relative Strength Index was first introduced by J. Welles Wilder in the June 1978 issue of Commodities Magazine (it's now called Futures Magazine), and then later, it was reintroduced in his book, New Concepts in Technical Trading. OK, I think that's enough on the history, I don't want to bore you. I just thought we should give credit where credit is due. Now, lets get on to good stuff, how can we make money using this handy little momentum indicator.
The index follows the momentum of price as an Oscillator that ranges between 0 and 100. The index does this comparing the magnitude of a stock's recent gains to the magnitude of its recent losses. Using this scale of 0 to 100, you can determine overbought and oversold levels. Readings above 70 are considered overbought and anything under 30 oversold. So how does this help me in trading? If the RSI rises above 30 it is considered bullish for the underlying stock. On the other hand, if the RSI falls below 70, it is a bearish signal. That means if the RSI has fallen below 30 (meaning it's oversold) and rises back above 30, it could mark a potential entry point. Just remember, this should be used to confirm some other buy signal. Don't use it as a lone buy signal.
Then, there is my favorite signal, "The RSI Divergence". There are two types, the bullish and the bearish. A bullish divergence occurs when price makes a lower low and the RSI indicator makes a higher low. A bearish divergence is just the opposite, price makes a higher high, but RSI makes a lower high. So what does all this mean? If you see a stock put in a lower low, but the RSI doesn't confirm it with a lower low of it's own, then get ready for this stock to reverse it's trend.
That's just two ways you can use this indicator. There are many more. Learn all you can, never stop educating yourself, and you will see your profits go through the roof. I hope this article is of help. Good Luck, and may all your trades be on the winning side.
Chris F Jones is owner of Stocks-n-Options.com. An educational site, where stock and options traders can learn to trade using technical analysis. Visit http://www.stocks-n-options.com for more information.
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