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Saturday, May 28, 2011

RSI- a TA indicator to fine-tune buy-sell entry points

RSI (Relative Strength Index), is a TA (Technical Analysis) indicator which helps an investor to fine-tune his entry points while accumulating that stock.
We shall not delve much in its mechanism but concentrate on how it helps us in understanding whether a stock is in overbought or oversold zone.
Generally RSI above 70 is considered overbought and RSI below 30 indicates oversold zone.
When RSI is above 70 i.e. overbought zone, that indicates probability of stock price coming down is higher, and hence savvy investor shall wait till price retraces to normal zone as every investor would like to invest at lowest possible price.
Similarly while selling the investment, if stock is oversold zone then savvy investor shall wait till stock retraces to normal zone as every investor would like to sell his investment at highest possible price.
Though RSI does not give exact predictions but indicates highly probable direction of price movements and investor needs to take advantage of the same.
In the following chart, arrows numbered from 1 to 5, shows the entry points where an investor could accumulate the ticker SBIN.
But savvy investor shall do the buying at arrow 5 as RSI in oversold zone indicates a highly probable move in the counter direction (northward movement).

 

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