Making sense of stock indicators

Ever wish you had a cheat code for trading? Well, RSI (Relative Strength Index) and SMAs (Simple Moving Averages) might be the next best thing! These popular technical indicators can help you figure out when to jump into a trade and when to make your exit. Let’s break it down.

What’s the deal with RSI?

RSI helps spot whether a stock is overbought or oversold, which can hint at an upcoming price reversal. It works on a scale from 0 to 100:

• Above 70? The stock might be overbought and due for a pullback.
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• Below 30? The stock could be undervalued and could bounce back.
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• Default setting: 14-day RSI, but you can tweak it based on your strategy.

And what about SMAs?

SMAs smooth out price action, helping you see the bigger trend. The two most common SMAs are:

• 50-day SMA: Short-term trend indicator
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• 200-day SMA: Long-term trend indicator

The SMA crossover trick

Ever heard of the golden cross and death cross? They happen when:

• Golden cross: The 50-day SMA moves above the 200-day SMA → Bullish signal 
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• Death cross: The 50-day SMA moves below the 200-day SMA → Bearish signal 

Why use RSI and SMA together?

RSI and SMA complement each other well for spotting trends and reversals. Each one is useful on its own, but together, they give a much clearer picture.

• RSI tells you if a stock is overpriced or a bargain.
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• SMA crossovers show where the trend is heading.

For example, if the RSI is below 30 (oversold) and the 50-day SMA crosses above the 200-day SMA, that’s a strong buy signal!
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When RSI and SMA strategies shine

Earnings season

Company earnings reports can cause major price swings. RSI and SMAs help filter out the noise:

• RSI shows if a stock is overbought or oversold after an earnings move.
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• SMA crossovers confirm if the move is part of a bigger trend or just short-term hype.

Market corrections

When the market takes a dive, RSI can highlight oversold stocks, while SMAs confirm if it’s time to buy or if the downtrend is here to stay.

Setting up your RSI and SMA trade

Bullish setup (buying opportunity)

• RSI nears 30 (oversold)
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• The 50-day SMA crosses above the 200-day SMA (golden cross)

Bearish setup (selling opportunity)

• RSI nears 70 (overbought)
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• The 50-day SMA crosses below the 200-day SMA (death cross)

RSI and SMA crossover example: Amazon (AMZN)

Looking at Amazon’s stock chart, suppose:

• The 50-day SMA crosses above the 200-day SMA → Uptrend confirmation
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• RSI is near 30 → Potential reversal from oversold levels

These signals together suggest a buy opportunity.

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Managing risk in RSI and SMA trading

Stop-loss placement

• Earnings volatility? Use a wider stop (2–3% below entry).
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• Normal conditions? Keep it tighter (1–1.5% below entry).
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• Consider the stock’s Average True Range (ATR) for smarter stop-loss levels.

Profit targets

• Short-term trades: Take profits when RSI nears 70 or the SMA crossover weakens.
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• Long-term trades: Hold as long as the 50-day SMA stays above the 200-day SMA, selling gradually when RSI hits extreme levels.

Key trading tips

Before entering a trade, consider:

• Multiple timeframes (daily charts for trends, hourly for precise entries)
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• Market conditions (overall market direction, sector trends, stock-specific news)
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• Earnings dates (to avoid surprises)
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• Stock liquidity (higher volume = smoother trades)

Start testing RSI and SMA strategies today

These indicators are powerful, but they work best as part of a broader strategy. Practise with RSI and SMA strategies using a free Deriv demo account. It’s a great way to fine-tune your skills before trading real money.

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