How To Use RSI To Spot Top Penny Stocks
Every trader has heard the phrase, “buy low, sell high.” And although they know this phrase some might not know how to find when penny stocks may be at a low. This is why understanding stock momentum is important.
However, there are tools known as technical indicators that help investors figure out a stock’s momentum. One such indicator is known as the Relative Strength Index (RSI). It is a favorite among momentum traders and here is why:
Penny Stocks 101: What Is The RSI?
This technical indicator helps traders identify the buying and selling strength over a period of time. The RSI has a value scale from 0 to 100. Its typical settings indicate that penny stocks (or blue-chip stocks) above 70 RSI is considered “overbought” and if under 30 RSI is considered “oversold.” Some traders like to expand that range to 80 and 20 in order to weed out potential fake outs.
When a stock is below 30 RSI, buyers like to step in and buy penny stocks at a low price. When the stock is above 70, sellers tend to get out and take profits before a potential downtrend. Technical traders will use multiple indicators in order to confirm their suspicions about a stock’s potential movements.
[Bonus Content] How To Make Money With Penny Stocks
And while indicators like this are good, they aren’t foolproof. So in my opinion, it’s best to use indicators as a guide to finding penny stocks to add to your list but not necessarily the end-all, be-all of buying and selling.
As you can see, before the drop, the RSI climbs along with the price. Once the RSI went above 70, momentum started to die, and you see the following downtrend. This is why the RSI can be a very good momentum indicator when trading.
Penny Stocks & Relative Strength
The RSI is very good for spotting a potential stock reversal and fulfilling the” buy low, sell high,” mentality. You should not rely on the Relative Strength Index alone. While technical indicators help you understand the metrics of the market, there are other factors that may impact a penny stock’s price movement.
So, it’s important to understand other factors like the type of news coming from the company, look into a company’s filings, and watch things like volume. At the end of the day, the more research you do can help better your chances of buying penny stocks that win big.