What is the meaning of RSI? The Relative Strength Index (RSI) is a technical analysis indicator used to measure momentum and helps assess the strength of an asset in trend.
RSI is calculated by comparing price movements with time and volatility.
The indicator ranges from 0 to 100, with values over 70 is considered overbought and values under 30 considered oversold.
It is also a good indicator to confirm if a trend is bullish or bearish. If the RSI is more than 70, it may signal an overbought condition.
This suggests to investors they should consider taking profits. If RSI is below 30, it could also signal lower volatility, making stocks more attractive to buy.
Generally speaking, it registers as positive when the stock is trending upwards.
Conversely, it turns negative when a stock trend goes down. If prices are moving sideways, RSI will remain at 0.
In this post you will learn:
- What is the RSI indicator
- How does the RSI indicator work
- Limitation of the RSI indicator
- How to read the RSI indicator
- and more…
Understanding RSI Indicator
The RSI indicator gives off two different signals in the financial trade. It shows the buy and sell signals.
Before using the RSI, a trader must understand how it works and how to utilize it in trades.
Is Relative Strength Index Reliable
Is RSI a good indicator? The Relative Strength Index is a very accurate measure of how well a market is doing.
It measures the stock’s momentum and predicts whether it will continue going up or down.
The Relative Strength Index (RSI) is a great reference to make sure you’re making good trades.
All other things being equal, the higher the RSI figure, the more overbought or over-bullish a security may be.
Conversely, the lower the RSI figure, the more oversold or over-bearish a security may be.
RSI provides a quantitative measure of the potential for a stock to increase or decrease in price.
The Relative Strength Index for stocks is reliable when it is within an appropriate range.
Most traders use this technical indicator in Stock, Forex, Indices, and futures trades.
However, the indicator does not guarantee successful trades.
Many factors need to be put in place before a trader can achieve a successful trade.
Factors like a good trading strategy, adequately set stop-loss, and take profits.
Investors are always looking for the next best thing to give them an edge in the market.
The Relative Strength Index, or RSI, is tool traders use to give them a trading advantage and make more informed investing decisions.
Relative Strength Index Indicator (RSI) On Tradingview
The below image shows WNBD (Winning Brands Corp) penny stock chart with RSI Indicator included.
As the price starts to trend higher, you will notice RSI curling upwards and over the 50 (neutral) zone.
How To Add Relative Strength Index Indicator On Tradingview (RSI Indicator)
- Go to www.TradingView.com and click on the “Sign Up” button at the top of the page
- Create a username and password (make sure that you remember your credentials)
- Once you have finished signing up, open a chart
- Click on Indicators
- Type in RSI or Relative Strength Index Indicator (RSI)
- Add the indicator by clicking on the name RSI
- Close the pop-up window
- You should now be able to see the RSI Indicator on your Tradingview charts
- You can setup Relative Strength Index Indicator (RSI) in Tradingview, Thinkorswim (TOS), Ninjatrader, MT4, or any other charting analysis tool you are subscribed to.
How To Read Relative Strength Index Indicator (RSI)
The Relative Strength Index (RSI) is an oscillator that calculates the magnitude of recent gains and losses to ascertain the current “position” that security or market is holding.
The indicator has a broad scale of 0-100, with readings above 70 being considered overbought and readings below 30 being considered oversold.
How To Read The RSI Indicator (Example Detailed Breakdown)
High RSI vs. Low RSI 0 to 100
Traders use the RSI indicator to estimate the strength of the market, using the current price and data.
An RSI reading is scaled from 0 to 100. With 0 being the lowest and 100 being the highest.
If RSI reads below 30, the market is oversold and about to reverse.
This means the bearish price is going to reverse and have a bullish run.
This gives a buy signal; traders buy and sell later when the price has increased, thereby generating profit.
If RSI reads above 70, it indicates that the market is overbought and about to reverse in price.
This means the bullish price will change and start a bearish run.
This gives a sell signal; traders predict a sell signal, selling the trade at a higher price than it was bought.
Traders also use the indicator to pinpoint centerline crossovers.
When a price moves from below the 50 centerlines to above the centerline, the preceding trend is growing stronger, showing a buy signal.
If the price moves from above 50 centerlines to below the centerline, it indicates that the bearish trend has strong momentum, and the bullish trend is losing its momentum. It predicts a sell order.
Identifying Trading Setups Using RSI
Below is a trading strategy that uses the RSI indicator and one additional indicator confirming the trend.
Scan the RSI for readings signaling the market is oversold or overbought.
Use other technical indicators to confirm the signals on an upcoming piece reversal.
For instance, if RSI indicates an oversold reading, a price reversal to the upside is expected but not guaranteed.
It is advisable to think of opening a trade to profit from the reversal if one of these situations is confirmed.
(MACD) The moving average convergence divergence has displayed a divergence from price.
For instance, if the price of an asset forms a new low, and MACD hasn’t, instead it has reversed from bearish to bullish.
The (ADX) average directional index has had a price reversal.
If any of the conditions above are met, then contemplate on opening a trade with a stop-loss order set just below the current low price, it depends on if the trade is a long trade or a short trade.
The profit target can be set at the recent support or resistance level.
Opening Trades With RSI Signals
The major signal generated by the RSI oscillator is used in specifying an overbought or an oversold trade.
However, it is constantly used as a filter in systems where the major indicator is a trend one.
Nevertheless, there are a lot of traders who trade using only the RSI signals.
When the line of RSI reading climbs above 70 or goes below 30, it indicates an overbought and an oversold trade, respectively.
However, it is advisable to wait for the next signal verifying a trend retracement.
Rules For Opening Trades Based On The RSI Indicators
There are rules guiding the RSI signals when opening a position based on the signals generated from the indicator.
- It can only be considered a short position(sell) when the RSI line crosses level 70 from above
- A long position (buy) can only be considered when the RSI line crosses level 30 from below
When It Comes To Closing Positions, There Are Rules To Follow:
Set a stop-loss at the most recent low, and set your profit target to the price that is 2 to 3 times higher.
Close position when an opposite original is generated.
Set your stop loss and set your profit target tighter.
This buy trade does not support a wide profit target. It is advisable to wait for an opposite signal to set a wide profit target margin.
However, trading based on only the signals generated from the RSI indicator isn’t the best approach.
The indicator is structured to serve as a filter and not a direct trade signal.
A technical trading strategy is more effective when considering the signals from price actions.
What Is A Good RSI For A Stock?
Investors can use RSI as a tool for gauging whether an asset might be poised for a reversal.
Typically, you would look to buy when RSI is below 30, as this signals the stock price is oversold.
Conversely, when the RSI is above 70, this would signal overbought, and you should potentially start thinking about locking in some profits for any open positions you may have.
Is A High RSI Good Or Bad?
A high RSI can be a good thing in the short term if you are long shares in a stock and expecting it to go higher.
Remember, RSI does not stay high forever and can come back down.
You should consider locking in some profits if you are in an open position when this happens.
What Is An RSI Buy Signal?
Traders predict a buy signal for a trade when the RSI result of the trade reads above 30 and crosses the centerline.
This means the trade is gaining momentum.
If the trade is in a bullish trend, it will need additional information from other technical tools to confirm the trade signal.
What Is An RSI Sell Signal?
The RSI indicator indicates a sell signal when the RSI readings cross the 70 levels from above.
This means the trade is losing momentum. However, other conditions need to be met before the trend can be confirmed.
How To Use RSI Effectively
RSI indicator should be used in conjunction with other indicators to determine the direction for a trade.
This indicator is an oscillating one that provides traders with a gauge for market momentum and can identify buying opportunities or sell signals.
RSI is best utilized by traders who are not trading for the short term, as it relies on momentum over a more extended period to give a reliable indication.
Relative Strength Index Formula
The Relative Strength Index Formula, developed by J. Welles Wilder, Jr. in 1978, is perhaps the most famous indicator of uptrend continuation or uptrend strength.
It is calculated by taking the average trading range (ATR) over the last x number of trading days and dividing it by the same period’s true average range (ATR).
The indicator is calculated by subtracting the number of periods where the underlying asset’s value is greater than or equal to the value of the moving average line from the number of periods where it is less than or equal to this level.
How Is RSI Calculated?
RSI has a simple formula but can hardly be explained without a series of examples.
The basic formula is
RSI = 100 – (100 / (1 + (Average of change in bullish price/Average of change in bearish price).
Pros And Cons Of RSI Indicator
There are a lot of benefits and disadvantages that come with trading with RSI indicators.
Pros Of RSI Indicator
- The RSI indicator is simple to execute and comprehend
- The RSI indicator adequately works in a non-trending zone
- The RSI can be utilized in pinpointing the loss of momentum
- The RSI indicator is used in predicting price reversals and identifying price reversal levels
Cons Of RSI Indicator
- When the price is trending, the RSI indicator delivers false signals
- When price reverses, the RSI indicator does not put the volume of trade into consideration
What Are Additional Benefits Of Relative Strength Index (RSI) Indicator
- Useful for gauging overbought and oversold conditions
- The RSI can help you decide when a stock is due for a reversal
- Understanding the Momentum of a Stock
- Useful for identifying divergences
- Useful in identifying potential trend reversals
- More accurate than conventional oscillators
Is RSI A Good Indicator?
RSI is a good indicator that helps traders in picking up trends.
The indicator is one of the most popular technical tools used by traders trading the different trade classes.
The indicator has proven to be reliable and produces accurate trade signals.
However, using RSI technical tools does not guarantee success in a trade.
A trader needs to consider other factors such as a good trading plan and risk-reward ratio to attain successful trades.
Types Of Technical Indicators (Most Used)
- List Of Technical Indicators (Most Used)
- Buy And Selling Volume Analysis Indicator
- Relative Strength Index Indicator (RSI)
- Moving Averages For Stocks (MA, EMA, SMA)
- Accumulation vs Distribution Indicator
- Moving Average Convergence Divergence (MACD)
- TTM Squeeze Indicator
- Know Sure Thing (KST) Indicator
- Awesome Oscillator and MACD Histogram
- Volume Weighted Average Price (VWAP)
Conclusion And Key Takeaways
The relative strength index is an excellent technical tool used by several traders to predict the trend of trade.
It is accurate and produces good trade signals.
However, it is advised to use this technical tool together with other technical indicators to confirm the of a trade.
Many traders use this technical tool because it is easy to read and doesn’t require extensive study.
It has also been proven to provide good trade signals, although the indicators do not produce accurate trends when the trade is trending.
Note: Technical tools are indicators used by traders to enhance the performance of their trades.
They are not an express ticket to generating massive profits in a trade.
Generating profitable trades is a lot more complex than using one technical tool.
A lot of factors are involved in attaining successful trades.
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