False signals to buy or sell can be formed when stocks have large spikes in price and like all technical indicators your trade plan should not solely be based on RSI.
Entering on an RSI cool off and pull back can give a great risk vs reward entry and usually will have a tight range. The opposite is true with short selling and stocks that are over sold or below 20 on the RSI scale. A great entry can be provided when a stock breaks out and is pushed to an over bought level above 70 and after the stock pulls back and the RSI has cooled off and gotten back under its overbought level or under 70. Typically you don't want to buy into a stock that is over bought or above 70 RSI, however with strong volume and momentum over bought stocks can also have large range moves. A security will become overbought when RSI is above 70 and over sold when the RSI is below 20. RSI has a range from 0 to 100 and uses momentum to compare significant gains and losses of a stock. Relative strength index is a great indicator that allows us to see whether a stock is becoming over bought or over sold. Also note how the stock was trading below its moving averages. Secondly the green arrow showing the exact opposite where the 20day sma crossed above the 50day sma and signaled a new up trend with the stock trading above its moving averages. Notice the red arrow pointing out a time where the 20day sma (green line) crossed below the 50day sma (blue line) signaling a trend reversal and the start of a down trend. Moving averages will adjust based on the time period for example a 20 period moving average on a 15 min chart will give you the average pice of the last 20 periods of 15 minute candles.īelow we will take a look at a chart showing 20day sma, 50day sma, 200day sma. The most commonly used simple moving averages are 20 period, 50 period, and 200 period. If you are looking at a daily chart then a 50 period Simple Moving Average will give you the average price of the last 50 days. Moving averages are most commonly used to identify trend and find support and resistance areas. The most commonly used moving averages are simple moving averages and exponential moving averages.
Moving averages are considered a lagging indicator because they are based on past prices. Moving averages in technical analysis can help you see clear price action by removing the noise from random price changes. Moving Averages can be good tools to identify a stocks trend.
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