Relative strength index – RSI

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What is the relative strength Index – RSI’

The relative strength index RSI is a momentum indicator that measures the magnitude of price changes to analyze overbought or oversold. It is primarily used to attempt to determine overbought or oversold conditions in trade asset.

Index of destruction of the relative strength RSI’

The relative strength index (RSI) is calculated according to the following formula:

RSI = 100 – 100 / (1 + RS)

Where RS = average number of periods over a specified period of time / average loss periods within a certain period of time

The RSI indicator provides a relative assessment of strength recent performance of a financial instrument price, making it a Momentum indicator. The values of RSI range from 0 to 100. The default time frame for the comparison periods into periods is 14, and in 14 trading days.

The traditional interpretation and use of the RSI is that values of RSI of 70 or higher indicate that a security is overbought or overvalued and, therefore, can be aimed at the reversal or a corrective pullback in price. If RSI value of 30 or below is usually interpreted as indicating an undervalued, or oversold condition, which may indicate a change of trend or corrective price reversal up.

The relative strength index is an example of a chart of RSI

Tips for using RSI

Sudden large price movements can create false signals for buying or selling in the RSI. Therefore, it is best to use with a clarification of its application or in combination with other confirming technical indicators.

Some traders, trying to avoid false signals from RSI, use more extreme values of the RSI as a buy or sell signals, such as RSI readings above 80 to indicate overbought conditions, while RSI readings below 20 indicate oversold.

RSI is often used in conjunction with trend lines and support lines, or resistance often coincides with levels of support or resistance in the RSI reading.

Look for divergence between price and RSI indicator is another tool to improve its application. Divergence occurs when the security makes a new high or low in price, but the RSI does not have a corresponding new high or low values. Bearish divergence when price makes a new high and the RSI does not, is perceived as a signal to sell. Bullish divergence, which is interpreted as a buy signal occurs when price makes a new low and the RSI value isn’t. An example of bearish divergence may unfold as follows: security increases in price to $ 48, but RSI makes a higher value of 65. After the correction down a bit the security of subsequently making a new high at $50, but the RSI rises only to 60. The RSI is bearishly diverged from the price movement.

For more information on RSI, see Introduction to relative strength index and relative strength index and its failure-swing points.

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