How to Use the RSI Technical Indicator to Time Your Stock Trades

Last Updated: 6.9.2023 20:55

Whether You Believe the Price of a Stock is Going Higher or Lower, Remember the RSI Never Lies

It’s no secret that stocks can be volatile at times. However, this volatility can work in your favour and help you produce consistent gains. It all comes down to market timing and patience. Two of the main questions I receive on a weekly basis from friends and colleagues are “when do I sell?” and “when do I buy?” Although I will never tell an investor what to do with their money, I am happy to tell them how I would play the trade.

They can easily implement my examples into their own trading plan. Speaking of trading plans, it’s essential you have a plan before you enter any trade. Set a range for your entry as well as your exit. One of the biggest mistakes I see is investors not having a plan. Create a plan, stick to it, and your trading life will be a lot better.

Now, let’s review some examples of how I would approach specific trades using a candlestick chart and one main technical indicator. In my opinion, there is no need to load your charts up with a bunch of different indicators.

Please keep it simple. Now, let’s proceed.

Source: Shutterstock

Also Read: Nvidia Stock Soars as AI Chip Maker’s Q2 Earnings and Guidance Demolish Expectations (VIDEO)

Relative Strength Index (RSI)

Investopedia describes the relative strength index (RSI) as:

“A momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a stock or other asset. The RSI is displayed as an oscillator (a line graph that moves between two extremes) and can have a reading from 0 to 100.”

Simply put, if the RSI indicator is showing a reading of 70 or higher, it means the stock is in overbought territory, and it’s now likely that a pullback or correction is coming soon. This would be an ideal time to take some profits off the table or look to exit entirely and wait for an opportunity to re-enter in the future. In extremely bullish situations, you can get an RSI reading of 85 or higher.

Exiting a position in multiple trades as the stock is moving higher past the 70 RSI level is one way you can attempt to maximize your exit prices. Remember, it’s ideal to buy on weakness and sell into strength. We are never going to pick the top perfectly, so do your best to capture as much as the move as possible, but don’t worry if it’s not perfect. Profit is profit. The same goes for buying at the bottom. You will rarely ever call the bottom perfectly, either.

If the RSI shows a reading of 30 or below, it means the stock is now in oversold territory and could be considered undervalued. Stocks trading in this oversold range are usually due for a reversal or bounce higher. This would be a great time to enter into a position or add to an existing position. The number 30 should only be used as a gauge. Oftentimes times, stocks won’t actually drop below 30 on the RSI. So, any reading in the 30s or even the low 40s can still make for a great entry point.

Let’s look at a couple of examples of how we can implement this simple RSI strategy into swing trading stocks. Please note these are just examples and not actual trades we made. We used the lows and highs of each stock to emphasize these examples. Your actual trades may vary. This is just an idea of how to use this strategy in your own trading.

Trade Example Using the RSI

Stock: Google (NASDAQ: GOOGL)
Potential entry date: February 24, 2023
Potential entry price: $89.44
- RSI: 38.43
Potential exit date: May 22, 2023
Potential exit price: $126.43
- RSI: 80.20
Trade Duration: 3 Months
Potential ROI: +41.36%

Source: Barchart

Notes: Normally, you won’t be fortunate enough to buy at the absolute bottom and sell at the exact top of any run. As we said, this is to show the potential of the trade and how to time entries and exits. Even if you bought in during the days leading up to the bottom or the days following and exited in the week surrounding the top, you would have done very well.

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