Using The RSI Chart For A Second Opinion

The RSI chart is on of my favorite oscillators.

I like to have it open all the time. It gives me something that my other oscillators and overlays don't give me. It lets me know when a stock is overbought or oversold.

The main thing that the RSI is used for is to measure overbought and oversold conditions.

I have, like many investors at times used the RSI chart as an indicator in itself. It can be a very useful indicator. However, it tends to often give false indicators. So, if you do want to use it to screen for stocks, that's just fine.

Using RSI As A Stock Screener

When the RSI line crosses over the fifty line, it is considered a signal. If it crosses above, it is considered bullish. If it crosses down, it is considered bearish. Simple as 123.

So, that is the first way that the RSI chart is most commonly used.

However, my preference is the second way. The second way to use the RSI chart is to determine if a stock is overbought or oversold.

Determining Overbought And Oversold Conditions

The RSI oscillator is on a chart between zero and one hundred.

I have previously discussed what the fifty point is used for. Now I will discuss a few other points. When determining an overbought or oversold condition, you will use the thirty line and the seventy line.

When it goes below the thirty, it is considered extremely oversold.

When it goes above the seventy, it is considered extremely overbought.

Being oversold is a bullish indicator and being overbought is a bearish indicator.

Coming Back From Extreme Conditions

Yes, if a stock goes below the thirty line, it is extremely oversold. And it is a bullish signal. However, when it comes back above that thirty line, it can be used as a bullish indicator.

The same with the seventy line except vise-versa.

Finding Divergences

Finally, the last way that the RSI chart is used is to find divergences.

Similar to the MACD, the RSI can be used to tell when a stock is going to make a reversal.

Lets say that you are reviewing a stock that you are thinking about buying long. The stock looks good but you're not quite sure.

Lets say that the stock that you are thinking about buying has been making higher highs. That's great. This is a common bullish indicator. But, as I'm sure you know by now, its always to have a second opinion.

So, you turn to the...

RSI

If the RSI is making higher highs along with the stock, go for it. But, that's not always the case. If it is making lower highs, this is a warning signal. It's a bearish sign and you may not want to buy.

Ready For The Next Step?

So all in all the RSI is pretty simple to understand. It has come to be an invaluable tool in my trading strategy. I hope you now understand the basics and feel comfortable using it for yourself right along-side your main chart.