This is for good reason, because as a member of the oscillator family, RSI can help us determine the trend, time entries, and more. Today to help become better acquainted with the indicator, we will review three uncommon tips for trading with RSI. When traders first learn about RSI and other oscillators, they tend to gravitate to overbought and oversold values.
While these are intuitive points to enter in the market on retracements, this can be counterproductive in strong trending environments. RSI is considered a momentum oscillator, and this means extended trends can keep RSI overbought or oversold for long periods of time. This could have spelled trouble for traders looking to buy on a RSI crossover from overbought values.
Instead consider the alternative and look to sell the market when RSI is oversold in a downtrend, and buying when RSI is overbought in an uptrend. All oscillators have a center line and more often than not, they become a forgotten backdrop compared to the indicator itself. RSI is no different with a center line found in the middle of the range at a reading of Technical traders use the centerline to show shifts in the trend. If RSI is above 50, momentum is considered up and traders can look for opportunities to buy the market.
A drop below 50 would indicate the development of a new bearish market trend. Notice how when price pushed upward, RSI remained above Even at times, the center line acted as indicator support as RSI failed to break below this value on June 24 th prior to the creation of a higher high.
However, as momentum shifted, RSI dropped below 50 indicating a bearish reversal. Knowing this, traders could conclude any existing long positions, or look for order entries with prices new direction. RSI like many other oscillators is defaulted to a 14 period setting. This means the indicator looks back 14 bars on whatever graph you may be viewing, to create its reading.
Even though 14 is the defaulted setting that may not make it the best setting for your trading. Normally short term traders use a smaller period, such as a 7 period RSI, to create more indicator oscillator. While longer term traders may opt for a higher period, such as a 25 period RSI for a mother indicator line. While there may not seem like much difference at first glance, pay close attention to the centerline along with crossovers of the 70 and 30 values.
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