Using the Relative Strength Index (RSI)
This video shows how Richard Adcock, a Technical Analyst from the Corellian Academy, uses the Relative Strength Index, or RSI, to increase trading efficiency.
RSI measures the average number of upward movements compared with downward moves over a specified period, and Adcock prefers a shorter setting of nine periods to provide quick signals.
RSI is a single-line indicator with a range of 0 to 100. When it exceeds 70, it suggests an imminent market correction, while when it is below 30, it indicates a potential market reversal. Overbought readings suggest a market correction.
The effectiveness of the RSI, however, depends on the market's trending condition. It is possible to ignore overbought and oversold readings in strong uptrends or downtrends since the market continues to move in the same direction despite the readings. As a result, Adcock suggests adjusting the overbought and oversold levels according to the trend to address this issue.
The video demonstrates how using RSI on the S&P 500 Index and UK 100 Index charts could be helpful for detecting overbought and oversold conditions during sideways market activity.
Additionally, the video emphasizes the importance of identifying divergences between RSI and price action.
In conclusion, the RSI can be a valuable tool for identifying market turning points, but its effectiveness depends on the trend of the market. Overbought and oversold levels should be adjusted based on the prevailing trend and traders should not rely solely on RSI signals particularly during strong trends.
