Don't leave stock movements to chance. How to read the 'now' using RSI and the Advance-Decline Ratio

"Is now a good time to buy stocks?"
"Has this stock already risen too much?"

When you're investing in stocks, you often find yourself wondering about the "timing" like this.

However, it's a bit dangerous to act based solely on intuition or a gut feeling.
Something that can serve as a "guidepost" in such moments is technical indicators.

In this article, I will explain two simple and easy-to-use indicators—RSI (Relative Strength Index) and the Advance-Decline Ratio—in a way that is easy for beginners to understand.

What is RSI (Relative Strength Index)?

Let's start with RSI.

RSI stands for "Relative Strength Index," an indicator that tells you whether the current stock price is "overbought" or "oversold."

For example, imagine a balloon that is inflated to its limit. If you blow any more air into it, it might pop...
RSI is like a numerical indicator that warns you of such "excessive" states.

How to use RSI

RSI is calculated by comparing the gains and losses in stock prices over a certain past period (e.g., 14 days).

The calculation formula is a bit complex, but roughly speaking, it works like this:

• If RSI is above 70% → The stock price might be too high; a sell signal.

• If RSI is below 30% → The stock price might be too low; a buy signal.

The method of acting by taking advantage of these "overbought" and "oversold" timings is called a contrarian strategy.

In other words, you buy when the RSI is below 30% and sell when it exceeds 70%.
RSI provides hints for timing your moves by identifying the peaks and bottoms of the waves.

What is the Advance-Decline Ratio?

Another indicator I want to introduce is the Advance-Decline Ratio. Unlike individual stocks, this is like a
thermometer that measures the heat of the entire market.

Specifically, it is calculated as "(Number of stocks that rose during a certain period ÷ Number of stocks that fell) × 100."

How do you read the Advance-Decline Ratio?

For example, if 70 out of 100 stocks go up and 30 go down...

→ The Advance-Decline Ratio is 70 ÷ 30 × 100 = approximately 233%. That is quite overbought.

As a rough guideline:

• 120% or higher → The entire market might be overbought. A sign to consider selling.

• 70% or lower → The market is oversold. A buying opportunity?

Just like with RSI, the basic approach is to think in terms of 'contrarian' investing.
Stay calm in an overheated market. Be warm toward a chilled market. That sense of balance is important.

The combined technique of RSI × Advance-Decline Ratio

Each indicator is useful on its own, but combining them allows for more accurate judgment.

For example...

• Even if you can determine that an individual stock is 'oversold' using RSI,

• if you know from the Advance-Decline Ratio that 'the overall market is still hot,' you might be able to decide not to jump in immediately.

Also, when the RSI is hovering around the midpoint of 50% or the Advance-Decline Ratio is not moving significantly, you can read it as no trend is emerging = a time to wait and see.

Finally: Reading the 'signs' behind the numbers

Both RSI and the Advance-Decline Ratio are just numbers.
However, the 'feelings' of investors are reflected behind them.

• 'It's gone up enough, maybe I should sell soon'

• 'It's gone down quite a bit, maybe it's time to pick some up'

Technical indicators are what 'visualize' those voiceless voices as numbers.

Why not start with these simple indicators, especially as a beginner?
By relying on the power of numbers rather than just intuition, you will be able to make calmer decisions.

Investing is a series of decisions.
Having your own 'yardstick' should be the first step toward facing the market without panicking or being swayed.