How to trade with a Relative Strength Index RSI

what is relative strength index

The RSI is always between 0 and 100, with stocks above 70 considered overbought and stocks below 30 oversold. Divergence between the price and RSI can also be analysed for potential reversals. The y-axis (vertical axis) of the RSI chart shows the variation in RSI value, typically in the range of 0 to 100. Most graphs also have vertical lines at the 30 and 70 marks so you can easily tell if an asset is outside of that range (meaning it may be oversold or overbought). The x-axis (horizontal axis) of the chart shows the time period in question, generally 14 days. The primary function of the RSI is to demonstrate overbought and oversold conditions.

What does a RSI of 70 mean?

RSI represents the price momentum. It indicates the best time to sell and purchase security using the 70-30 trigger method. The RSI above 70 is considered overbought, and below 30 is considered oversold. In other words, if the average gain exceeds the average loss, it signals a potential decline in the market.

In spite of being created before the digital age, Mr. Wilder’s indicator is still extremely popular among traders. It is widely used not only in the cryptocurrency space but also in … Some traders interpret that an overbought currency pair is an indication that the rising trend is likely to reverse, which means it’s an opportunity to sell.

Determining the Trend using RSI

Short or longer timeframes are used for alternately shorter or longer outlooks. High and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum. Fundamental traders believe that an asset is oversold when its price is lower than its fair or intrinsic value. Technical analysts believe oversold assets are those that reach a certain level on a technical indicator, focusing on price and historical data rather than the asset’s value.

  • Very overbought and very oversold periods are defined at 80 and 20 respectively.
  • Welles Wilder in 1978 to measure the speed and the change of price movements.
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  • This lower low is not at oversold levels but is usually between 30 and 50.
  • RSI is one of several indicators that include an element of prior data.

As we all know from shoe shopping, trends sometimes happen thanks to intangible factors like human emotion. The Relative Strength Index can be helpful, but since many variables determine whether stock prices go up or down, it’s not a foolproof way to make predictions. When the stock market as a whole is trending upwards (a bull market), RSI values are usually between 40 and 90. When it heads downward (a bear market), 10 to 60 is more common. Investors need to be well-informed and skilled at noticing even quite subtle fluctuations on the RSI graph.

How the RSI Is Calculated

If we assume a 14-day period, a RSI with zero value would mean that prices moved lower in all 14 periods. This means that there are no gains to measure and the RSI by default has a value of zero. The RSI, on the other hand, is 100 if all 14 periods experience gains. Since there are no losses to measure, the index by default becomes 100.

  • When price hits a new low or high that isn’t supported by a corresponding new low or high in the RSI reading, this can indicate an impending price reversal in the market.
  • If a price swing fails to make a higher high while the RSI scale is above 70, it’s a strong indication that prices are likely to reverse toward the downside.
  • If your device does not support this action you can adjust the size via the ‘Settings’ panel.
  • Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend.
  • Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.

RSI measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. Because the MACD uses moving averages, it can be used to qualify trading signals generated by the RSI indicator. These two indicators are often used together to provide a comprehensive technical picture of a market. Therefore, the RSI is most useful in an oscillating market where the asset price is alternating between bullish and bearish movements. A negative or bearish divergence suggests a short-term decline in the securities price to follow. The Relative Strength Index (RSI) is one of the most popular and widely used momentum oscillators.

RSI Trendline Breaks

The calculation’s solution, or value, is referred to as relative strength. Another way of using the RSI indicator is trying to spot potential points of price reversal. To do so, traders look for the so-called bullish and bearish divergences. A bullish divergence happens when the RSI and the asset price move in opposite directions. Select RSI from the Indicator dropdown, select the Parameter and the position (above, below, or behind the underlying price plot).

The signals produced by both indicators are similar although not exactly the same. Some traders like to add both indicators to their analysis and wait for signals to align for extra confirmation before making their trading decisions. Other traders may prefer to use one indicator or the other to avoid duplication in their analysis. For this reason, a demo account with us is a great tool for investors who are looking to make a transition to leveraged trading. Remember, you should have some trading experience and knowledge before you decide to trade with technical indicators. You should consider using the educational resources we offer like  CAPEX Academy or a demo trading account.

RSI calculator

Failure swings are another occurrence which Wilder believed increased the likelihood of a price reversal. One thing to keep in mind about failure swings is that they are completely independent of price and rely solely on RSI. Failure swings consist of four “steps” and are considered to be either Bullish (buying opportunity) or Bearish (selling opportunity). RSI Divergence occurs when there is a difference between what the price action is indicating and what RSI is indicating. Specifically there are two types of divergences, bearish and bullish. The Charles Schwab Corporation provides a full range of brokerage, banking and financial advisory services through its operating subsidiaries.

what is relative strength index

Readings of 70 or higher indicate overbought conditions and an increase in the possibility of price weakening (going down). Some traders interpret that an oversold currency pair is an indication that what is relative strength index the falling trend is likely to reverse, which means it’s an opportunity to buy. If the relative strength index is below 50, it generally means that the stock’s losses are greater than the gains.