HOW IS IT USED ?
In the classic view, a security is thought to be overbought when its reading is above 70 and oversold when its reading falls below 30. This makes it a good indicator for mean-reversion systems. Wilder recommended using the 70 and 30 levels as overbought and oversold levels respectively. When the moves up over the 30 line it is considered a possible reversal while a move down below the 70 line is considered a possible reversal.
When the is above 70 it is a potential exit signal if you are in a long position and when it is below 30 it is a potential exit signal if you are in a short position. Some traders use extreme readings for entry points in the direction of the long-term trend. Thus, if the long-term trend is , then you'd wait for the to reach oversold territory, which would be a potential entry point for a long position. Conversely, if the long-term trend is , then overbought conditions could be a potential point to short the security.
I added the possibility to add on the chart a 2nd timeframe for confirmation.
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