The relative strength index (RSI) is a fairly reliable indicator that can tell you whether a stock or market is overbought or oversold. The RSI fluctuates between 0 and 100, although it hardly ever reaches either of those levels. You can choose the levels between 0 and 100 that you think indicate that a stock is overbought or oversold, but for the sake of analysis in this chapter, I use 30 as my oversold level and 70 as my overbought level. Therefore, RSI readings under 30 tell you that a bottom could be coming soon and that you should be ready to buy, and readings over 70 should lead you to consider putting on a short or selling a long. (For more of the nitty gritty details of the RSI, check out Chapter 11.)
The RSI has two potential uses when you're working on candlestick analysis:
I You can combine the information from an RSI with reversal patterns to further confirm that a reversal is imminent, and it's time to take a long position.
i You can also use the RSI to help you select your exit levels, whether they are stops to prevent losses or exits that allow you to walk away with a tidy profit.
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