Understanding Technical Indicators: RSI

One of the most popular stock market indicators is the Relative Strength Index or RSI for short.  Understanding technical indicators like the RSI is the first step in being able to successfully earn profits rather than just an intellectual exercise.

The most important thing to remember is that no single indicator stands alone.  All indicators are properly used in conjunction with price or another indicator in attempt in understanding stock charts.

Here are three RSI/price combinations that can help you earn profits when trading with technical analysis.

1,  The RSI moves to a lower bottom, price lifts to a higher bottom.

This type of pattern is generally discovered in a price uptrend after price corrects from a sell off. You can think of this as a bounce from the lows. When the RSI sets a lower bottom and price sets a higher bottom it means that the uptrend or bounce from the lows will likely continue higher. In other words, this is a trend continuation signal.

2. Price and the RSI create equal or higher bottoms.

This pattern is also a continuation pattern. The uptrend will likely continue higher just like the example above.

3. The RSI creates a higher bottom while price moves to a lower bottom.

This pattern is usually seen at the end of an uptrend. It is a reversal pattern meaning that the upward trend is expected to soon end.

All this can be wrapped up by stating that price will likely move higher if there is a divergence between price and the oscillator. In addition, if price and the RSI  bottoms converge in an uptrend, the uptrend is likely to continue.

These signals generally work best during medium term price reversals during the medium term trend. The best way I have found to determine the medium term trend is the 20 period simple moving averages.

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