Whenever trading with assets, the use of auxiliary tools allows investors to be able, as long as they have studied and are aware of their use, to reduce the risks of working in the financial market.
For those who want to "play" with volatility to maximize gains in a short time, use the RSI - Relative Strength Index tool, which determines the accumulation of business volume, its speed and magnitude to offer a relationship of purchase and sale prices and determine opportunities to enter or exit an asset position.
The indicator was originally developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, “New Concepts in Technical Trading Systems.”
The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100 and is a momentum indicator used in technical analysis that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset.
The primary trend of the stock or asset is an important tool in making sure the indicator's readings are properly understood. For example, well-known market technician Constance Brown, CMT, has promoted the idea that an oversold reading on the RSI in an uptrend is likely much higher than 30% and that an overbought reading on the RSI during a downtrend is much lower than the 70% level.1
As you can see in the following chart, during a downtrend, the RSI would peak near the 50% level rather than 70%, which could be used by investors to more reliably signal bearish conditions. Many investors will apply a horizontal trendline between 30% and 70% levels when a strong trend is in place to better identify extremes. Modifying overbought or oversold levels when the price of a stock or asset is in a long-term horizontal channel is usually unnecessary.
A related concept to using overbought or oversold levels appropriate to the trend is to focus on trade signals and techniques that conform to the trend. In other words, using bullish signals when the price is in a bullish trend and bearish signals when a stock is in a bearish trend will help to avoid the many false alarms that the RSI can generate.
The upper bar, overpriced and the lower bar, undersold, determine when, in the case of overpriced, the asset should be sold and, in the case of underpriced, to buy the asset.
The percentage determination is how conservative or aggressive, prone to risk, the investor is and is willing to take risk.
Also, the amount of periods will influence how the speed of the charts will occur and at what point the overprice and undersold appear.
Combined with moving averages and fractals, for example, this indicator will provide security for the asset in addition to translating the movements in business volumes carried out within the established periods.
Volatility requires care and this tool can help you enter periods and maximize time to gains and time to exit the position.
Of course, this is not a sure money proposal, just an explanation of a tool commonly used by most veteran investors.
However, as always, it must be studied and there is no mathematical guarantee that its use will always result in gains.
All uses of statistical tools serve, at the most, to minimize the risk of loss, but they depend, as always, on how studious and how much patience the investor has, mainly to wait for the right moment to attack the position: hence the name "moment indicator".
Good hunting!
