Relative Strength Index (RSI)
Before we discuss this lesson, we need a prior understanding of the Indicators.
When an crude oil is overbought or oversold, it is shown by the ( RSI ) Relative strength index, which is an oscillating indicator.
By comparing the price action over a period of time (usually 14 periods) enables the indicator to show if the price has become significally high or low.
This can find out when a current trend may be coming to an end or when a new trend may be forming.
The RSI helps to time the entries and exits to maximize profits before there is a rise or fall in price.
The illustration chart below depicts the RSI indicator
We can observe that the indicator appears below the chart.It is made up of a single line that moves between two levels – 0 and 100. In the middle of the chart is the 50 level.
Using the 50 level to show buying and selling power
A movement above 50 shows that more traders are buying the crude oil than selling, and are driving the price up.
If the RSI moves below 50, it shows that more traders are selling than buying, and are driving the price down.
The illustartion chart depicts the RSI level above 50, indicating there are more buyers than sellers:
Number 1: RSI over the 50 level, indicating more buyers in the market.
When the line is below 30, a downtrend is likely to come to an end.
RSI reaches 30 levels then there will be Potential long opportunity advisable.
If reach higher above 70 -80 Level there will be indication overbought condition better exit the long entry as preferable .
Using the 30 and 70 level to see overbought and oversold conditions
RSI begins to approach the 30 level - likely that the downtrend is ending.
RSI begins to approach the 70 level - likely that the uptrend is ending.
This is the point marked where the crude oil is overbought or oversold.
Sometimes overbought condition will be extended above the level like 75/25 or even 80/20 levels to mark overbought and oversold conditions.
This is illustrated in the chart below
Number 1:RSI moves above 70 – the up trend comes to an end.
We can use the RSI to also exit your position when it is indicating the end of a trend.
Using the RSI indicator for exits
Changing the RSI settings
The setting of the RSI indicator can be changed to make it more (or less) sensitive to the change in price action.
Increasing the setting makes the RSI less sensitive and results in fewer instances of the crude oil being identified as overbought or oversold.
It is more difficult to identify shifts in trend direction.We can notice that the indicator mostly never signals an overbought or oversold scenario which shows the indicator ineffective.
The illustration above shows that with the setting at half the standard rate, the indicator line switches between overbought and oversold more often.
Lower interval settings – the indicator will pick up more signals, although there may be more false signals.
The overbought and oversold conditions can be found out earlier by reducing the settings. But at the same time we are prone to receive more false signals.
Most traders do not change the standard setting from 14, as this is the level that gives them the most useful and reliable information.
An overview of the lesson discussed so far….
When an crude oil is overbought or oversold, it is shown by the (RSI) Relative strength index, which is an oscillating indicator.
The entry and exits can be timed using the RSI.
The RSI shows there are more buyers in the market when it moves above the 50 line. It shows there are more sellers in the market when it moves below the 50 line.
When the RSI goes below 30, this indicates that the crude oil is oversold and the downtrend is likely to end. RSI moves between two levels – 0 and 100, with the 50 line in the middle.
When the RSI goes above 70, this indicates that the crude oil is overbought and the uptrend is likely to end.
We can change the settings to make the indicator more (or less) sensitive to price movement.
Increasing the setting makes the indicator less sensitive and shows few instances of overbought and oversold conditions.
Decreasing the setting makes the indicator more sensitive and shows more instances of overbought and oversold conditions, but provides more false signals.
The standard setting of 14 periods normally give the best results.