Relative Strength Index

A momentum indicator used to determine overbought and oversold conditions

Developed by J. Welles Wilder Jr.

About Relative Strength Index

Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes by comparing the size of its gains with its losses over a period of time.

Relative strength index is used to determine overbought and oversold conditions of trading instruments. The RSI is range-bound and fluctuates between 0 and 100. A reading above 70 is considered overbought while a reading below 30 is considered oversold.

The most commonly used period for RSI is 14 period. Choice of time period is dictated by trading styles employed. For short term trading, it is advised to use smaller time period (less than 10). For longer term trading, it is advised to use longer time period (higher than 20).

Trading Application

Divergence

Bullish divergence occurs when prices fall and make new low but RSI does not fall or even rises.

Bearish divergence occurs when prices rise and make new high but RSI does not rise or even fall.

Overbought/Oversold

BUY when RSI crosses above 30 from below and SELL when RSI crosses below 70 from above.

Please keep in mind that during a strong uptrend/downtrend, prices could stay in overbought/oversold conditions for a long time.

Divergence

Blue lines on the chart below depicts a bullish divergence condition where prices fell but not followed by RSI. Blue circle (1) showed when the breakout occurred and price changed direction from down to up.

Red lines on the chart depicts a bearish divergence condition where prices rose but not followed by RSI. Red circle (2) showed when the breakout occurred and prices changed direction from up to down.

Overbought/Oversold

Please keep in mind that during a strong uptrend/downtrend, prices could stay in overbought/oversold conditions for a long time.

BUY when RSI crosses above 30 from below and SELL when RSI crosses below 70 from above with stop losses below/above the last low/high.

Blue circles and red lines on the chart show when RSI crosses above 30 from below. BUY at open of next bar/candle (blue arrows) with stop loss below the last low.

Red circles and red lines on the chart show when RSI crosses below 70 from above. SELL at open of next bar/candle (red arrows) with stop loss above the last high.

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