Technical analysis is a type of analysis in which we examine the movement of stock prices on a daily, weekly, yearly basis.
There are indicators in the technical analysis which shows the direction stock by examining different values like overbought, underbought values etc.
Relative Strength Index is a type of indicator which is used to know the overbought and underbought level.
It can also be used to examine the trend of the value price.
It is very easy to use and have simple features which be useful for anyone.
It was invented by J. Welles Wilder Jr., he was a technical analyst who is well known for other indicators as well.
In RSI there is a fixed period which is 14 and the standard overbought and undervalued levels are 70 & 30.
It takes the sum of the price increase and price decrease in a given period and divide the increased price with decrease price and puts it in the scale of 0 to 100, if all the candles are green or red in a given period then the price is 100 per cent or 0 per cent.
So 0 means completely undervalued and 100 means completely overvalued.
If the price breaks or reaches 70 levels then there is a high probability that the price can go down and if the price reaches or breaks the 30 levels then it is undervalued and the price is likely to move up.
It is very helpful to find the trend of the asset there is a saying in finance that “Trend is your best friend” so if the price is moving towards overbought level or undervalued level then we can go by the Trend and can make a healthy return for the short term.
The trend signal can be used for short-term and overbought and undervalued can be used for long term.
The overbought and undervalued levels can be changed if we want to improve the accuracy.
It can be used with other indicators to get a more accurate prediction of that value.
Keep in mind that if there is a bull market or constant rush in price because of any event or reason, then even if the price is overvalued, it does not mean that the price is coming down, it can be there for months because of the constant uptrend.
Similarly, if the price is undervalued because of the downtrend or economic slowdown, it can be there for months as well.