As a beginner trader, you must understand the importance of being able to make smart and timely trading decisions. Your trading decisions often depend on your ability to rightfully analyze market trends. With that said, you will use a wide range of tools for analyzing market trends effectively, and one of those tools is the RSI Indicator, which stands for relative strength index.
Read on to learn more about what the RSI indicator is and how it can help make better trading decisions.
RSI Indicator – What Is It
You might want to consider the RSI indicator as a tool to measure the change and speed of price fluctuations on a scale of zero to a hundred. The general rule is that an RSI above seventy refers to the fact that a trading asset might be overbought. On the other hand, if the RSI is below thirty, it suggests that the trading asset might be oversold.
If you want to be a successful trader, you must be able to analyze these levels correctly to expect potential market trend continuations or price reversals.
Before using an RSI, you should know everything about what is a margin account, as your brokerage account will help amplify your potential trading profits. It is in your best interest to be able to use a margin account along with the RSI for effective and profitable trading.
RSI Reflects the Internal Strengths of the Market
The RSI can actually help you make better trading decisions due to the fact that it indicates the internal strength or weakness of the market. The RSI compares the recent losses and gains of the market, which helps identify potential market momentum. Watch out for the RSI if it indicates a level higher than fifty, as this reflects bullish momentum.
On the other hand, if the levels are lower than fifty, it indicates a bearish momentum. Using the RSI, you can carefully analyze market momentum and make informed decisions regarding whether you want to enter or exit a trading position.
Leverage the RSI Divergence
Speaking of the usefulness of the RSI for better trading decisions, another potential aspect of the RSI is its divergence. Now, you should know that RSI divergence occurs when the price of your trading asset moves in the opposite direction.
For instance, asset prices could be making new highs while the RSI could be failing to do so. In such a situation, the RSI divergence indicates a dropping trend, which prepares you for a potential reversal ahead of time.
Incorporate Practical RSI Strategies for Effective Trading
As a beginner trader, you should know that different traders use the RSI in different ways. For instance, if your trading style is that of a swing trader, then you must be using the RSI to correctly identify short-term price fluctuations or reversals.
On the other hand, if you are a long-term investor, you might use the RSI to confirm bigger market strengths. The key is to back-test your RSI settings and make sure that they align with your individual trading style and preferred risk tolerance level.
