The Relative Strength Index (RSI) is a momentum oscillator that can help you measure the bullish or bearish strength of a market via changing price movements. RSI measures can be a useful way to check if an asset is oversold or overbought during a particular timeframe. At its most basic level, the RSI will rise when the number of positive closes increases and will reduce as the number of losses increases.
Understanding RSI
The RSI measures the prices of an asset within a timeframe and uses those prices to generate a number between 0 and 100. The more asset declination there is, the more that RSI number trends towards 0. The reverse is also true, as high appreciation will trend upwards towards 100. Most traders set RSI oscillations up on a 14-day chart, but you can choose any length of time necessary to fit into your strategy.
RSI Formula: RSI = 100 – 100 / (1 + Relative Strength)
RSI Trends to Watch For
While many traders have unique RSI trend strategies and mapping systems, these are a few of the most popular RSI trends that could potentially indicate a market movement.
Overbought or Oversold
While there are many competing theories and strategies involving RSI numbers, a traditional reading will take any number of 70 indicates an overvalued market that could soon turn bearish. Any number under 30 indicates an undervalued market that could quickly turn bullish.
Bullish Signals
Here are a few common bullish RSI signals.
- Bullish Oversold Signal: If the RSI falls below your calculated oversold levels (e.g., 30%), then quickly rises above those levels again, this can be an indicator of a bull market buildup.
- Bullish Divergence Signal: Like other indicators, divergence plays a crucial role in calculating RSI bull markets. A divergence happens when the indicator (RSI in this case) makes a higher low (i.e., becomes less bearish) while the price action makes a lower low.
- Bullish Trend Alert: Another common bullish indicator is the trend alert — which happens when the RSI goes from below to above 50%.
- Bullish Failure Swing: Like a bullish divergence, bullish failure swings will be trend reversals. But, in this case, the RSI rises above the swing high (i.e., the fail point).
Bearish Signals
Here are a few common bearish RSI signals.
- Bearish Overbought Signal: If the RSI rises above your calculated overbought levels (e.g., 70%), then quickly dips below those levels again, this can be an indicator of a bear market buildup.
- Bearish Divergence Signal: Like bullish divergence signals, bearish divergence signals are a trend reversal. The RSI will make a lower high (i.e., becomes more bullish) while the price action makes a higher high.
- Bearish Trend Alert: If the RSI goes dips from above 50% to below 50%, it could be an indicator of a bear market.
- Bearish Failure Swing: Like a bearish divergence, bearish failure swings will be trend reversals. But, in this case, the RSI falls below the swing low (i.e., the fail point).