RSI at extremes such as 30-70 and 20-80 is seen as a sign of reversal by a large community of investors.
I am commonly asked, is this true? And my answer is straight “NO”.
Knowledge propelled by the so-called gurus of the stock market is to scare the investors. There is a huge difference between being a scared investor and a calculated risk taker, we will cover this in detail in the forthcoming articles.
Let us understand what means ‘RSI at extremes’ and how to use this information.
RSI above 70 means that the relative strength (in comparison with previously exhibited price action) has increased to quite a good level. That means the stock is now expected to perform well. However, the negative side of it is GREED that will grapple the stock at any point and big players might start booking the profit. Thus, the investor has to start booking profit or hedge his positions to contain unnecessary risk. But that does not mean to exit the position fully or to short the positions. It just means ride the rally with buckles on.
RSI below 30 is, however, a different case. Here the stock is losing its strength and that leads to fear. Big players however see this as an opportunity, unless this weakness is because of some event or news that impacts the fundamentals of the stock. In such cases, volume and demand play a critical role. It means start tracking the stock for signs of accumulation.
Use and apply logic while making investment decisions.