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When we are trading in the trend, we want to let our profits run as long as possible and do not want to enter into trades with a low probability of working. We can use the RSI with those new parameters to help us identify some of those opportunities as we approach supply and demand levels. In an uptrend for instance, we want to hold longs as supply breaks and prices move to higher levels. If we see on pullbacks that the price fails to break 40 on the RSI, then you are still in a bullish trend and are likely to break the subsequent supply level. However, once that 40 level is broken, then you would expect the trend to pause or reverse and profits may need to be booked at the supply levels.
Remember to trade with the trend and look at price to help support your decisions to enter or exit trades. We want to let our profits run as much as possible and even though it is easier said than done, we can do better if we feel more confident in our ability to analyze the price action on the charts. Greater profits will make up for any small losses we may incur and lead us down the road to profitable trading.

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Relative Strength Index (RSI)

 

  A technical indicator developed by Welles Wilder to help investors gauge the current strength of a stock's price relative to its past performance. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent.

RSI readings above 70 indicate the shares are overbought and are likely to start falling. Readings below 30 indicate the shares are oversold and a rally can be expected. The time period specified determines the volatility of the RSI. For example, a 9-day time period will be more volatile than a 21-day time span.

When using Investor charts to study RSI, you can select whatever time period works best for your investing strategy.

  The main purpose of the RSI is to measure the marketís strength and weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market. Additionally, the value of 50, can serve the same purpose as the zero line in other oscillators. The slowing down of a current trend or a trend reversal may be signaled by crossing above or below 50.

  Selling when the RSI is above 70 or buying when the RSI is below 30 can be an expensive trading system. A move to those levels is a signal that market conditions are ripe for a market top or bottom. It does not indicate a top or a bottom. A failure swing or divergence accompanies your best trading signals.

  While the RSI can be used as an overbought and oversold study, it works best when a failure swing occurs between the RSI and market prices. For example, the market makes new highs after a bull market setback, but he RSI fails to exceed its previous highs.

  Another use of the RSI is divergence. Market prices continue to move higher/lower while the RSI fails to move higher/lower during the same time period. Divergences may occur in a few trading intervals, but true range divergence usually requires a lengthy time frame, perhaps as much as 20 to 60 trading intervals. When the RSI begins to fall below the trough formed by a double-top, this may indicate a trend reversal and a buy signal. A double-bottom in the RSI with penetration upward may signal an opposite trend reversal and a sell signal.

  The RSI exhibits chart formations as well. Common bar chart formations readily appear on the RSI study. They are trendlines, pennants, flags, head and shoulders, double tops and bottoms, and triangles. Plus, the study can highlight support and resistance zones. Support and resistance zones often show up clearly on the RSI before becoming clear on the bar chart. Many analysts draw support and resistance lines based on the RSI in the same manner as they would draw trendlines on a chart.

  The daily bar chart is the most common chart expression for the RSI. In addition, you may plot a weekly chart to confirm the RSI indications on a daily chart; weekly charts offer more significance when tracking trending activity.