Traders are often told to buy excessive fear or greed.
Unfortunately, many aren’t aware of when to actually pull the trigger, or realize when fear or greed have gotten way out of control.
But there’s a simple way to know exactly when to buy and when to sell.
Of the dozens of indicators on the market, one of my personal favorites is Relative Strength (RSI), a momentum oscillator that measures the speed and change of price movements of a stock. The closer RSI gets to its 30-line, the more oversold the stock is considered to be. The closer RSI gets to its 70-line, the more overbought the stock is considered to be.
What’s interesting is that the same technical rule with RSI applies to stocks, ETFs, indexes and even crypto currencies. Let’s start with a look at the Dow Jones Industrial Average with a six-month chart, for example.
Notice what happened each time RSI fell to its 30-line, the DJIA eventually bounced higher.
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Then again, it’s never a good idea to use just one indicator.
We can combine RSI with Bollinger Bands (2,20), MACD and Williams’ %R. Take a look at what happens when the index hit that lower Band each time, confirmed with an oversold read on MACD and Williams’ %R. Not long after, the index bounced.
Confirmation among those multiple indicators told us fear had gotten way out of hand.
Or look at what happened about 80% of the time with a stock like AT&T (T).
When RSI dipped to its 30-line, confirmed with a dip to the lower Band, confirmed with oversold conditions on Williams’ %R, the stock found its bottom and bounced.
Does it work 100% of the time? No, it does not. But it can help determine when to buy and sell on excessive bouts of fear and greed.
Or, we can even look at a cryptocurrency, like Bitcoin.
Notice what happens when the lower Bollinger Band is hit, coupled with RSI falling to or below its 30-line. Not long after, the crypto bounces higher about 80% of the time.
Sure, you may say, “Any one can say that AFTER the fact.”
And sure, we could do that. But that’s not what we’re doing. Look at what happens each time any of the above-mentioned trades pulls back with confirming oversold indications on RSI. The reversal higher isn’t immediate. It takes a few days.
Again, though, confirmation is key.
RSI can be a powerful indicator when used correctly. Be aware of it. Learn it.