What is RSI indicator?
The most known indicator Relative Strength Index (RSI), developed by J. Welles Wilder, it is a momentum oscillator that measures the speed and change of price movements of an asset. The RSI oscillates between zero and 100. The RSI is considered overbought when it is above 70 and oversold when it is below 30. Signals can be generated with RSI indicator by looking for divergences and failure swings. Trader can also identify the general trend by using RSI indicator..
- RSI indicator is considered overbought when it is above 70 and oversold when it is below 30. We can adjust thes e traditional levels if it is necessary to better fit the security. As an example, if on a certain asset is repeatedly reaching the overbought level of 70 you may want to adjust this level to 80.
Note: During strong trends, the RSI may remain in overbought or oversold for extended periods.
- RSI also often forms chart patterns that may not show on the underlying price chart, such as double tops and bottoms and trend lines. Also, look for support or resistance on the RSI.
- In a bull market or an uptrend , the RSI can remain in between 40 to 90 range with the 40-50 zone can act as support.These ranges will depend on the RSI settings and the strength of the security’s or market’s underlying trend.
- During a bear market or downtrend, the RSI can stay between the 10 to 60 range with the 50-60 zone can act as resistance. These ranges will depend on the RSI settings and the strength of the security’s or market’s underlying trend.
- If underlying prices make a new high or low that isn't confirmed by the RSI, this divergence can signal a price reversal. If the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred. If the RSI makes a higher low and then follows with an upside move above a previous high, a Bottom Swing Failure has occurred.
The relative strength index is calculated using the following formula:
RSI = 100 - 100 / (1 + RS)