Relative Strength Index (RSI)
What is the relative strength index (RSI)?
The Relative Strength Index (RSI) is a momentum indicator used in technical analysis, developed by J. Welles Wilder. RSI measures the speed and magnitude of an asset's recent price changes to evaluate overvalued or undervalued asset price conditions. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. It can also indicate assets that may be primed for a trend reversal or corrective pullback in price and when to buy and sell.
RSI trading strategies
- Overbought signal
RSI indicator is expressed as a value between 0 and 100. When the indicator reading approaches the upper end of this range, the value is above 70, and the security in question is said to be overbought. A trader who is long might consider using the overbought signal as a signal to lock in profit and exit the trade he/she may already be in. Also, a trader who has no open positions might consider using the overbought signal as a signal to enter a new trade 'short'.
- Oversold signal
When the RSI indicator value approaches the lower end of the 0 to 100 range below 30, the asset in question is said to be "oversold." A trader who has no open positions might consider using the oversold signal as a signal to enter a new trade "long," thereby entering the market with a buy as the expectation is that the price will rise in the near term. Additionally, a trader who has already sold short in the market may consider using the oversold signal as a signal to lock in profit (if the price has fallen) and exit the trade with a buy.
- RSI divergence
A divergence signal with the RSI is considered when the highs or lows of the market price are moving in different directions from the highs or lows on the RSI indicator.
For a positive divergence, we look at the lows of both the price and the indicator. If the price is making higher lows, and the indicator is making lower lows, a positive or bullish divergence signal should be considered.
For a bearish divergence, we look at the highs of both the price and the indicator. If the price is making higher highs, and the indicator is making lower highs, a bearish divergence signal should be considered.
