RSI - Relative Strength Index - lstinvesting.com

RSI - Relative Strength Index

RSI is one of the most popular tools in technical analysis. This is because it is very simple to use and can be applied on any trading tools and on almost all trading platforms.

Properly used this tool can bring a big plus in our technical analysis.

Relative Strength Index (RSI) was created by J. Walles Wilder in 1978, in the book New Concepts in Technical Trading Systems, and has since become one of the most popular trading tools.

 

What is RSI

RSI is classified as a "impulse oscillator that measures the speed and variation of cotation movements." This indicator  shows the current and historical power or weakness of a market instrument based on closing prices over a period of time. It is used on 14 periods  but may be alsoused on  9 or 25 periods.

The measurement scale is  0 - 10,0 with intermediate levels positioned at 30, 50 and 70.

 

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Methods of using the RSI indicator


Like any other oscillator, this indicator is used to identify divergences.

 

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As soon as the chart forms higher highs (↗) and on the RSI we are seeing lower highs (↘), this signals a Sell divergence, announcing that the price is going to make a corrective move or even a trend shift.

If we have two Lower highs on the chart, and RSI forms Higher Highs, this signals a Buy divergence, indicating that the price can make a corrective move or a trend shift.

When divergences form on M15, M30, H1, they most likely announce corrective moves.

If divergences form on H4, D1, W1 or MN they announce trend changes.

       The best results are obtained based on the signals that appear on the support line and the resistance line, traced by indicators 30 and 70 levels.

 

Overbought and oversold levels.

RSI overbought level is considered to be above 70, and oversold level below 30.

For greater accuracy, this method may be combined with divergences.

When the mobile average of 14 periods strikes levers of 30 or 70, wait for a divergence on the same timeframe or a smaller one.

 

 

In the market, these levels are used as follows:

If the indicator is positioned in  the overbought area, this means that there are many buyers in the market and soon sales will begin because all those who wanted to buy has already bought.

If the indicator crosses level 70 downward or rejects from it, it is considered  a Sell signal.

The opposite is true for oversold market environmet.

 

Using these signals, we must keep in mind the current trend. If the trend is upward, the Sell signals of this indicator signals a correction and then a continuation of the trend and vice versa in a downward trend, the Buy signals indicate a possible correction and then the downward trend continues.

 

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Traders also use the 50 level. This level helps us understand the current market situation.

If the mobile average is positioned below this level and is downward, it is a Sell signal and we must avoid Long positions.

If the mobile average is placed above 50 and is upward, there is a Buy signal and we must avoid Short positions.

 

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The use of levels 20 and 80 as well as 14 periods average leads to same results. However, in this case, we have much stronger Buy or Sell signals.

If the mobile average is below 20, this is a strong Sell signal. Usually these signals are met at long-term trends.

If the mobile average is above 80, this is a strong buy signal. In this situation, look for the first touch or intersection of the level. Usually in long-term trends these signals may appear several timesș the next signal may be a change of trend. Obviously when reaching 20 or 80, a correction is expected, but  those who trade on shorter periods need to be careful about entering the market.

 

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If we have a lateral trend, it is recommended to use levels like 40 and 60 and the standard 14periods set. Stripping 60 downwards or rejections from it, offer a Sell signal and vice versa stripping 40 upwards or rejections from it are Buy signals.

However, this strategy offers a lot of false signals because it is recommended to use along with other indicators in the decision making process: Stochastic Oscillator (5,3,3), mobile averages and support and resistance levels.

 

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RSI usage rules

Divergences are used for eraly-identification of a trend’s ending.

This is the most recommended method for opening positions.

Levels 40 and 60 are  only use in lateral trends.

These strategies must come in the confirmation of the graphic analysis and be corroborated with it.

 

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