RSI Indicator COMPLETE Guide to Relative Strength Index about RSI

The maximum value (338.5 USD) occurred on February 19th, 2020, and from that point, it started to go down, causing millions of dollars in losses for investors. Together with the 7-SMA, 20-SMA, and 50-SMA, our relative strength index calculator says yes. Commodity and historical index data provided by Pinnacle Data Corporation. Unless otherwise indicated, all data is delayed by 15 minutes.

Wilder considers overbought conditions ripe for a reversal, but overbought can also be a sign of strength. Bearish divergences still produce some good sell signals, but you must be careful in strong trends when bearish divergences are normal. Positive and negative reversals put price action of the underlying security first and the indicator second, which is how it should be. Bearish and bullish divergences place the indicator first and price action second. By emphasizing price action, the concept of positive and negative reversals challenges our thinking toward momentum oscillators. Welles Wilder, measures the speed and change of price movements.

Register below to discover the top 5 mistakes losing traders make, how to avoid them, and more. As it turned out, the trader was right – the trend resumed running down after a local correction, and I made a profit on the correction. To get started, let’s install the RSI indicator in the LiteFinance trading terminal. The RSI line is displayed in a separate window under the trading chart. Now, we will build the curve to analyze RSI divergence with price. Between October 30th, 2020, and November 12th, 2020, several investors sold their Synnex positions, thinking that the stock was about to crash because it went up too much.

What Is a Good RSI Indicator?

Wilder features RSI in his 1978 book, New Concepts in Technical Trading Systems. This book also includes the Parabolic SAR, Average True Range, and the Directional Movement Concept (ADX). Despite being developed before the computer age, Wilder’s indicators have stood the test of time and continue to be applied by chart analysts.

Smoothing depends on the number of averaged periods to reveal the trend better. To read RSI, look for oversold and overbought levels at 30 and 70, respectively. When the RSI crosses down through 70, it is a sell signal to traders; when it crosses up through 30, it is a buy signal. Our 820 years of backtested data on 30 major US stocks show a 53% chance of beating a buy-and-hold strategy on a daily OHLC chart. Also, a 26-year backtest on the S&P 500 showed RSI outperformed the market by 45%. The most common settings for the RSI indicator is a 14-days lookback period with the oversold threshold set at 30 and the overbought threshold set at 70.

As a beginner trader, it’s important to understand how RSI works and how to interpret its values. In this article, we’ll break down the complex concept of RSI and explain it in simpler terms, using analogies and examples to help you better understand. The relative strength index is a momentum indicator that averages prices over a period. Investors use it with price indicators because it provides reliable stock buy or sell signals.

The RSI is typically based on a 14-day time frame with high values being 70 or above, and low values being 30 or below. Levels such as 80 or 20 indicate a stronger trend in upward or downward momentum, respectively. 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).

Bullish and Bearish Divergences in RSI

Traders may buy the security when the MACD crosses above its signal line and sell, or short, the security when the MACD crosses below the signal line. The RSI aims to indicate whether a market is considered to be overbought or oversold in relation to recent price levels. The RSI calculates average price gains and losses over a given period of time; the default time period is 14 periods. Values over 70 are considered indicative of a market being overbought in relation to recent price levels, and values under 30 are indicative of a market that is oversold. On a more general level, readings above 50 are interpreted as bullish, and readings below 50 are interpreted as bearish. RSI is a momentum oscillator, a type of technical indicator that fluctuates in a range, usually from 0 to 100.

You just connect the highs and lows of the RSI line with each other, and then you have the trend line. And as with any other trend line, it could act as support or resistance. In some markets, this may work better https://1investing.in/ than using the traditional, mean-reverting approach. If you, for instance, are playing with the stock market, it’s going to be much easier to find a mean reversion system that works, than a trend following.

• 2009 is committed to honest, unbiased investing education to help you become an independent investor.
• This is because overbought stocks tend to reverse their upward trends and revert to the mean once the demand has petered out or a catalyst has inspired a reversal.
• To filter out trades, we use the ADX indicator with a ten-period lookback, and require it to be higher than 20.

To test the RSI indicator on the largest US stocks in the S&P 500, I used the excellent backtesting solution provided by FinViz Elite. Finviz’s point-and-click backtesting engine allowed me to test RSI-14 on a daily chart over the previous 26 years. In this part of the article, we are going to show you some of the filters and conditions that we often use when we build trading strategies for our algorithmic trading. Adjusting the thresholds with the market is also in line with that we covered under “best parameters for RSI”.

The period of the indicator is simply the number of candles taken into account for the calculation of the percentage. You can change it by clicking a pen icon in the indicator window. Furthermore, you can adjust the color and thickness of the RSI line.

This strategy seems to benefit from higher volatility levels, and by requiring the ADX to be higher than 20 we filter out low volatility environments. Then we sell the position if the close crosses above the 5-day moving average. We buy if the 2-day RSI crosses below 20, if the market is above its 200-day moving average. Remember that we used RSI to find support and resistance levels.

Should I Buy When RSI Is Low?

Because of this tendency, traders sometimes can take advantage of mean-reversion trading. By default, the RSI’s overbought conditions and oversold levels are set to 70 and 30, respectively. When the RSI line goes beyond these levels, it means the market is in an extreme condition.

Wilder considered RSI overbought above 70 and oversold below 30. This chart features daily bars in gray with a 1-day SMA in pink to highlight closing prices (as RSI is based on closing prices). Working from left to right, the stock became oversold in late July and found support around 44 (1). Bottoming can be a process – this stock did not bottom as soon as the oversold reading appeared. From oversold levels, RSI moved above 70 in mid September to become overbought. Despite this overbought reading, the stock did not decline; instead, it stalled for a couple weeks and then continued higher.

It should go without saying that you shouldn’t trade on this indicator alone. Most technical analysts use RSI in conjunction with other technical indicators, fundamental analysis, and business cycle analysis. More importantly, chartered accountant monthly salary trends in inflation, potential moves by the Fed, the war in Ukraine, and other fundamental factors have the power to override any chart trends. But based on RSI, there’s room on the charts for stocks to keep moving higher.

Method 2. Combining with the Heiken Ashi candlestick chart

MSFT was in oversold territory or was undervalued, in December 2021. Some traders believe that Wilder’s overbought/oversold ranges are too wide and choose to alter those ranges. For example, someone might consider any number above 80 as overbought and anything below 20 as oversold. A divergence occurs when a stock’s price moves one way and RSI moves in the opposite direction. Overbought refers to a stock that has increased rapidly in a short period of time and may reverse lower.

In both cases, the first top of the pattern is drawn in the overbought or oversold zone, and then the oscillator line turns down and breaks through a key level. This failure to repeat the high (or low) is a sign that buyers or sellers are losing strength. From the above chart, it is evident that the price lows align with the reference points of the RSI indicator at a level of 28. The indicator line breaks through the resistance level before the actual price reversal, providing an advance signal of the breakout. In this case, a sell signal is triggered when the oscillator breaks out of the level established based on the reference points, which is level 28. The RSI indicator can help you know when to buy or sell a stock.

It’s essential to note that you should not consider the price rebound from level 80 as a signal to enter a trade in the uptrend. Bonds, commodities, and stocks increase and decrease in price following business cycles of economic growth and shrinkage. Some methods of Andrew Cardwell, her RSI mentor, are also explained and refined in the book. In Technical Analysis for the Trading Professional, Constance Brown suggests that oscillators do not travel between 0 and 100. Brown identifies a bull market range and a bear market for RSI. RSI tends to fluctuate between 40 and 90 in a bull market (uptrend) with the zones acting as support.

The RSI is an excellent tool, but like all other indicators, it can give a ton of false feedback. In the default settings on Phemex under your chart, the number “14” automatically shows up next to the RSI indicator. This means that you’re looking at RSI analytics for the last 14 days or 14 weeks. The following peak is higher than the previous one but the RSI is falling.

RSI as a Momentum Indicator

RSI is a versatile momentum oscillator that has stood the test of time. Despite changes in volatility and the markets, RSI remains as relevant now as it was in Wilder’s days. While Wilder’s original interpretations are useful for understanding the indicator, the work of Brown and Cardwell takes RSI interpretation to a new level. Wilder’s formula normalizes RS and turns it into an oscillator that fluctuates between zero and 100. The normalization step makes it easier to identify extremes because RSI is range-bound.

Select RSI from the Indicator dropdown, select the Parameter and the position (above, below, or behind the underlying price plot). Placing RSI directly on top of the price plot accentuates the movements relative to price action of the underlying security. You can apply “advanced options” to smooth the indicator with a moving average or add a horizontal line to mark overbought or oversold levels.

Another good approach could be to apply a moving average to the volume, and then only take a trade if today’s volume is lower or higher than the average volume. When we build a trading strategy, we usually start with the raw idea, and then improve on that idea. The improvements could be done by adding filters or additional conditions that remove bad trades, and make the equity smoother. For those who don’t remember the conventional interpretation, it was to buy when the RSI crosses below the oversold threshold. Failure swings could be said to be a more advanced version of RSI divergences, where we add additional criteria to complement the divergence.