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RSI Indicator Strategy
Master momentum trading with our comprehensive RSI analysis
Overview
- •RSI (Relative Strength Index) is a momentum oscillator that measures the speed and change of price movements.
- •It oscillates between 0 and 100, with readings above 70 indicating overbought conditions and below 30 indicating oversold conditions.
- •RSI helps traders identify potential trend reversals and overbought/oversold conditions in the market.
How RSI Works
1.
Calculation
RSI is calculated using the average gain and loss over a specified period (typically 14 periods).
2.
Overbought/Oversold
Readings above 70 suggest overbought conditions, while readings below 30 indicate oversold conditions.
3.
Divergence
RSI divergence occurs when price makes a new high/low but RSI fails to confirm, signaling potential reversals.
Key Strategies
1. Overbought/Oversold Trading
- •Buy when RSI crosses above 30 (oversold) and sell when it crosses below 70 (overbought).
- •Use additional confirmation from price action or other indicators.
2. RSI Divergence
- •Bullish divergence: Price makes lower lows while RSI makes higher lows.
- •Bearish divergence: Price makes higher highs while RSI makes lower highs.
3. RSI Trend Lines
- •Draw trend lines on RSI to identify potential breakouts and breakdowns.
- •Use these breakouts as entry/exit signals in conjunction with price action.
Limitations
- •RSI can remain in overbought/oversold territory for extended periods during strong trends.
- •False signals can occur in choppy or sideways markets.
