Stochastic/Relative strength Index (RSI) indicator

Stochastic

Another important indicator is Stochastic. Stochastic indicator used to read the chart and give us an early signal when one trend may end up. Unlike MACD indicator, Stochastic can determine Overbought or Oversold market conditions as shown below.

The Stochastic scale range from 0 to 100, when the lines reach 70, it indicates the Overbought condition and the prices will go down after just leaving the scale of 70. Meanwhile, if the line reach 30 it indicates the Oversold condition and the prices will rise once again after leaving the scale of 30. You may notice that Entry & Exit Stochastic signal is preferable the time where stoch leave overbought or oversold area as shown on the chart.

% K & % D( trigger line )

Stochastic has two lines which is % K & % D and normally called trigger line, if both lines intersect with each other it can give us entry or exit signal. Unfortunately trigger signal becomes less accurate as they often give false signal.


Relative strength Index (RSI)

RSI is almost the same as the stochastic and basically we can say that RSI can tells us something about the strength or momentum of the market trend.

RSI scale range from 0 to 100, with the scale 80 as Overbought limit while 20 as Oversold limit. It’s the same on how to read RSI indicator as Stochastic indicator discussed above.

The advantage of RSI is it can be used as a confirmation of the changes of the trend. Hence RSI is often used by many traders to avoid false signal. When the RSI line just cut through 50 level then it can be say that one trend is began to occur, look at the picture above.

Note that RSI is also one of lagging indicator type; hence it also has its own disadvantages. It often occurs when market suddenly strong or suddenly weak and it can give big impact to RSI signal and may lead to false signal.