One way to measure the market being overbought or oversold is to use momentum indicators. These types of indicators are often used as an essential aspect of a traditional day trading strategy for buying low and selling high.
The Relative Strength Index or RSI is a technical momentum indicator that is used to compare the size of recent gains against recent losses. It is used to help determine oversold and overbought conditions of a particular asset. Out of all of the indicators, it is considered to be the easiest one to understand and use. Mainly, it will measure an oversold or overbought level using a scale ranging from 1 to 100. As an example, should an indicator register an RSI of 18, it means it is tracking data over the last 18 periods. Each period could represent an hour, a day or a week on a chart.
Smart investors use commodity trading software programs and other day trading strategies combined with the relative strength index to determine the best time to buy or sell. A reliable day trading strategy incorporates the monitoring of the RSI on a commodity to register when readings rise above 70 or fall below 30.
Anytime a relative strength index indicator has reached 70 and above it typically indicates that the market has been overbought and is likely to perform a correction. Alternatively, when the RSI has fallen below 30, it indicates that the market has probably been oversold and is probably about to experience a rally.
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The Ultimate RSI will not only tell you what other traders are thinking, but it will also help you identify the market direction and relevant Support and Resistance levels.
Best of all, the relative strength index will sometimes tell you where the market is likely to go in advance of the actual move!
Knowing how to use this powerful weapon is considered “must-have” by many retail traders. They use trading software and their experience to look for RSI indications of market trend changes and for buying or selling opportunities as the market corrects itself.
Developing a day trading strategy around the relative strength index can eliminate the need to chase a market when it is overbought or oversold. It helps to minimize the risk when buying in a bullish market when, in fact, it has already been overbought.
Using a reliable technical indicator like the RSI and sticking to your trading strategy can help you exercise discipline and patience in your day trading activities.
Go beyond “traditional” interpretation of the Relative Strength Index – discover how the Ultimate RSI indicator works!
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