Technical Analysis- Using the RSI to Make Money
Relative Strength Index (identifies strength of movement)
Known as the RSI, this indicator is used to identify the strength of a move and then interpret it using numbers; 1 to 100. Moves above and below certain thresholds identify the strength of the direction it is moving in.
- A stock is considered “over-bought” if it‘s line goes above 70.
- It is considered “over-sold” if it’s line goes below 30.
The RSI is very useful in preparing us as traders to put a potential strategy in place by identifying possible future trends as well as determining strength. In terms of a trend, the “center-line” which has a number “50” can be used to identify a “bullish” or “bearish” lean.
These are simple helpful determinations of the strength of the movement but the RSI really helps to identify “divergences.” These are very important factors that will help us as we build our watch list. Divergences tell us what may be happening in the future with the stock and help us prepare for the initiation of a possible strategy in the future.
A positive or negative divergence is what we are looking for.
A positive divergence is formed when a stock has two consecutive lows. The second low
is lower than the first. But on the RSI, the second low is higher than the first. This may very well determine the weakness of the downward trend and signal a reversal is soon to take place.
A negative divergence is formed when a stock has two consecutive highs and the second high is higher than the first high. But the RSI’s second high is lower than the first. This may very well determine the weakness of the upward trend and signal a reversal is soon to take place.
What will we use the RSI for?
- Identifying “over-bought” and “over-sold” directions.
- Determining “bearish/bullish” leans with the center “50” line.
- Looking for future reversals through “divergences.”
John Mylant
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