Are you thinking of ways to navigate market trends and make smarter stock trades in 2024 and beyond? Here’s how the RSI can support you in making smarter stock trades, analyzing the market, and rejuvenating your overall trading strategies.
The financial landscape is constantly changing and evolving, especially in the light of technological advancements. With new technology and widespread data access, online trading platforms have become more available to a broader audience. This also means that trading stocks have become more accessible than ever. However, the complexities of trading can seem overwhelming, especially to people new to the trading world. That is why using technical indicators to serve robust trading decisions is recommended.
The rise of online stock trading
In the past decade, online trading has exploded, showing exponential growth. Reports have found that over 60% of retail investors are engaged in online stock trading. This growing trend is fueled by advancements in trading technology, coupled with a surge in online trading platforms catering to individual traders. The user-friendly interface of trading apps and platforms and a growing interest in personal finance management is what make more people inclined to engage in stock trading.
Online platforms like Exness make trading stocks easy for individuals. Platforms like this offer intuitive interfaces, real-time data, and educational resources. All of this is with the aim of empowering people to be able to make more informed trading decisions.
The basics to understand stock trading
Even though these platforms are intuitive and contain a lot of valuable materials, it is still important to have a solid knowledge of stock trading. The foundation of stock trading is to buy and sell shares of publicly traded companies. The aim of stock trading is to purchase stocks at a lower price, and then sell them off again when the price is higher to make a profit. To be successful in doing so, traders employ various strategies to inform their investments.
One strategy is day trading, which involves buying and selling stocks within a single trading day. The way traders capitalize on this strategy is from the short-term price movements, which makes this a strategy heavily relying on technical analysis. Another strategy is swing trading, where the focus is to hold on to stocks for days or weeks to capture price swings. Traders employing this strategy use technical indicators and market trends to identify potential entry and exit points. Lastly, a strategy is a long-term investment, which relies on purchasing stocks and holding them for a long period. This type of investment relies on fundamental analysis, where a company’s financial health and growth potential is considered for long-term benefits.
An introduction to the relative strength index (RSI)
In the book “New Concepts in Technical Trading Systems” from 1978, J. Welles Wilder introduced the relative strength index (RSI), which has since become a key tool in a trader’s toolkit. The RSI is a momentum oscillator, which measures the speed and change of price movements.
To calculate the RSI, the following formula is used: RSI=100−(100/1+RS). RS is the relative strength, which is the average of x day’s up closes, which has been divided by the average of x days down closes. The most typical time period for calculating RSI is a 14-day period, but this can be adjusted according to a traders’ strategy.
How to use the RSI
One thing is knowing how to calculate the RSI, but then how to use it? The RSI oscillates between 0 and 100. The primary usage of the RSI is to identify overbought or oversold conditions in a stock. The usual rule of thumb is that to identify overbought conditions, the RSI is above 70. When this happens, the stock is considered overbought, which is an indicator that the stock may be due for a price correction or pullback. To identify oversold conditions, the RSI is below 30. When this happens, the stock is considered oversold, which is an indicator that the stock may be undervalued and could experience a price rebound.
The RSI has other purposes as well. It can be leveraged to identify potential buy and sell signals. Take this example: A bullish sign can occur when the RSI crosses above the 30-level from below. However, a bearish sign can occur when the RSI crosses below the 70 level from above.
Best practices for using RSI
RSI is not a bulletproof strategy to apply, which means there are best practices related to using RSI to leverage the tool in the best way. One way is to combine the RSI with other indicators, since using RSI in isolation is not always sufficient. By combining RSI with other technical indicators, traders can get a more comprehensive view of the market. Such indicators could be moving averages or support and resistance levels.
It is also important to consider market conditions, as the signals from the RSI can be less reliable during strong trending markets. Lastly, it is also recommended to back-test strategies. This means that before applying the RSI in live trading, it can be beneficial to back test strategies by using historical data, which ensures that they align with a trader’s trading goals and risk tolerance.
Concluding thoughts
The realm of stock trading is expected to continue to grow. This is why it is essential to know about tools like the RSI which can bring various advantages to new traders. By offering valuable insights into potential market reversals and price corrections, the RSI is an integral part of a broader trading strategy for robust decision-making.
