Making Right Trading Decision

 indicates the overbought (70) and oversold levels (30) to traders.

Making right trading decision

RSI can work as an overbought and oversold indicator which the overbought level is above 70 and the oversold level is below 30. Traders buy when RSI has crossed below the oversold line because traders assume that an oversold currency pair is a signal to reflect a falling market trend that is likely to reverse. In contrast, the overbought signal indicates the rate is likely to fall when the resistance level for the currency pair is near or has been reached. So, traders should sell when RSI has crossed above the overbought line. Therefore, considering overbought and oversold conditions, traders can confirm price trend and movement and realize the potential price reversals through divergence in order to make a proper decision of using RSI to plan exit and entry point.

Using Nokia Corporation as an example, the graph below shows the stock performance and RSI movement of Nokia Corporation in the past one year. In the graph, NOK became overbought (circled in red) when bearish centerline crossovers took place in the late February and the beginning of March, as well as May. The extreme value (overbought) occurred in the beginning of May and the RSI reaching a relative strength index of 76. Since the NOK continued to hit a high record, the RSI showed a downtrend to form a divergence signal. This is an exit signal to traders that need immediately close the trade. It became oversold (circled in blue) when bullish centerline crossovers appeared in the middle of November of 2016 and late October of 2017. The signal tells traders to buy.[pic 1]

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Clear guidelines

The RSI has set an exact number to guide traders to identify the overbought and oversold signals so as to make an immediate and promt reaction to the stock market. The overbought level is above 70 and the oversold level is below 30. Traders buy when RSI has crossed below the oversold line because traders assume that an oversold currency pair is a signal to reflect a falling market trend that is likely to reverse. In contrast, the overbought signal indicates the rate is likely to fall when the resistance level for the currency pair is near or has been reached. So, traders should sell when RSI has crossed above the overbought line.