Relative Strength Index (RSI) Indicator Explained With Formula

Investopedia / Julie Bang

Definition

The RSI is a momentum oscillator that is widely used in technical analysis of stocks and commodities
to identify changes in momentum and price direction.

The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures
the speed and magnitude of a security's recent price changes to detect overbought or oversold
conditions in the price of that security.

The RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. The indicator was
developed by J. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in
Technical Trading Systems.1

In addition to identifying overbought and oversold securities, the RSI can also indicate securities that
may be primed for a trend reversal or a corrective pullback in price. It can signal when to buy and
sell. Traditionally, an RSI reading of 70 or above indicates an overbought condition. A reading of 30 or
below indicates an oversold condition.

The RSI is one of the most popular technical indicators, and it is generally available on most trading
platforms offered by online stock brokers.

Key Takeaways

 The relative strength index (RSI) is a popular momentum oscillator introduced in 1978.

 The RSI provides technical traders with signals about bullish and bearish price momentum,
and is often plotted below the graph of an asset’s price.

 An asset is usually considered overbought when the RSI is above 70 and oversold when it is
below 30.

 In some situations, the RSI line crossing below the overbought line or above the oversold line
can be seen by traders as a signal to buy or sell.

 The RSI works best in trading ranges rather than trending markets.
How the Relative Strength Index (RSI) Works

As a momentum indicator, the relative strength index compares a security's strength on days when
prices go up to its strength on days when prices go down. Relating the result of this comparison to
price action can give traders an idea of how a security may perform.2 The RSI, especially when used
in conjunction with other technical indicators, can help traders make better-informed trading
decisions.3

Calculating RSI

The RSI uses a two-part calculation that starts with the following formula:2
RSIstep one=100−[1001+Average gainAverage loss]RSIstep one=100−[1+Average loss Average gain 100]

The average gain or loss used in this calculation is the average percentage gain or loss during a look-
back period. The formula uses a positive value for the average loss. Periods with price losses are
counted as zero in the calculations of average gain. Periods with price increases are counted as zero
in the calculations of average loss.

The standard number of periods used to calculate the initial RSI value is 14.4 For example, imagine
the market closed higher seven out of the past 14 days with an initial average gain of 1%. The
remaining seven days all closed lower with an initial average loss of −0.8%.

The first calculation for the RSI would look like the following expanded calculation:
55.55=100−[1001+(1%14)(0.8%14)]55.55=100−⎣⎢⎡1+(14 0.8%)(141%) 100⎦⎥⎤

Once there are 14 periods of data available, the second calculation can be done. Its purpose is to
smooth the results so that the RSI only nears 100 or zero in a strongly trending market.
RSIstep two=100−[1001+(Previous Average Gain×13) + Current Gain((Previous Average Loss×13) + Current Loss)]RSIstep two=100−[1+
((Previous Average Loss×13) + Current Loss) (Previous Average Gain×13) + Current Gain 100]

Plotting RSI

After the RSI is calculated, the RSI indicator can be plotted, usually beneath an asset’s price chart, as
shown below. The RSI will rise as the number and size of up days increase. It will fall as the number
and size of down days increase.
Tradingview

As you can see in the above chart, the RSI indicator can stay in the overbought region for extended
periods while the stock is in an uptrend. The indicator may also remain in oversold territory for a long
time when the stock is in a downtrend. This can be confusing for new analysts, but learning to use
the indicator within the context of the prevailing trend will clarify these issues.

Why Is RSI Important?

 Traders can use RSI to predict the price behavior of a security.

 It can help traders validate trends and trend reversals.

 It can point to overbought and oversold securities.

 It can provide short-term traders with buy and sell signals.

 It's a technical indicator that can be used with others to support trading strategies.

Using RSI With Trends

Modify RSI Levels to Fit Trends

The primary trend of the security is important to know to properly understand RSI readings. For
example, well-known market technician Constance Brown, CMT, proposed that an oversold reading
by the RSI in an uptrend is probably much higher than 30. Likewise, an overbought reading during a
downtrend is much lower than 70.5

As you can see in the following chart, during a downtrend, the RSI peaks near 50 rather than 70. This
could be seen by traders as more reliably signaling bearish conditions.

Many investors create a horizontal trendline between the levels of 30 and 70 when a strong trend is
in place to better identify the overall trend and extremes.6

On the other hand, modifying overbought or oversold RSI levels when the price of a stock or asset is
in a long-term horizontal channel or trading range (rather than a strong upward or downward trend)
is usually unnecessary.
The relative strength indicator is not as reliable in trending markets as it is in trading ranges. In fact,
most traders understand that the signals given by the RSI in strong upward or downward trends
often can be false.

Use Buy and Sell Signals That Fit Trends

A related concept focuses on trade signals and techniques that conform to the trend. In other words,
using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when a
stock is in a bearish trend may help traders avoid the false alarms that the RSI can generate in
trending markets.

Tradingview

What Is a Bullish RSI Number?

A number of RSI levels can be considered bullish, depending on whether the market is trending up or
down or is rangebound.

One bullish signal is when the RSI crosses below 30, where it would be considered oversold. But as
noted above, bullish RSI signals are best used in uptrends. In a strong downtrend, the trend can
continue well after momentum indicators have hit oversold levels. In addition, any trade entered on
this signal may offer limited upside, since you’d likely be trading against a strong, recent trend.

Following a strong uptrend, another bullish RSI signal is a reversal after a decline to around 40-50, an
area considered support during an uptrend. This is often confirmation of a positive momentum shift
back toward the uptrend after a pullback, signaling potential for continued gains.7

What Is a Bearish RSI Number?

Bearish signals from the RSI appear much like bullish ones but in reverse. A basic bearish signal is
when the RSI crosses above 70, an overbought level. If this is followed by a move below 70, upward
momentum may be weakening, alerting traders to a potential price reversal.7 But again, bearish RSI
signals are best used in downtrends.
During a strong downtrend, one bearish RSI signal is a reversal after a rise to around 50-60. This is
often confirmation of a momentum shift back toward the downside after a pullback, signaling
potential for continued declines.

Interpretation of RSI and RSI Ranges

During trends, the RSI readings may fall into a band or range. During a strong uptrend, the RSI tends
to stay well above 30 and should frequently hit 70. During a strong downtrend, it is rare to see the
RSI exceed 70, while it frequently hits 30 or below.3

These guidelines can help traders determine trend strength and spot potential reversals. For
example, if the RSI can’t reach 70 on a number of consecutive price swings during an uptrend, but
then drops below 30, the trend is likely breaking down.

The opposite is true for a downtrend. If the downtrend is unable to reach 30 or below and then
rallies above 70, that downtrend has broken down and could be reversing to the upside. Trend lines
and moving averages are helpful technical tools to include when using the RSI in this way.

Be sure not to confuse RSI and relative strength. The first refers to changes in the price momentum
of one security. The second compares the price performance of two or more securities.2

Example of RSI Divergences

An RSI divergence occurs when the indicator and price begin to reach different levels, indicating a
change in momentum that precedes a change in price direction. For example, a bullish divergence
occurs when the security makes a lower low but the indicator forms a higher low. This indicates rising
bullish momentum and could be used to trigger a new long position.

A bearish divergence occurs when price makes a higher high but the RSI makes a lower high.8 This
indicates a possible shift to downside momentum.

As you can see in the following chart, a bullish divergence was identified when the RSI formed a
series of higher lows as the price formed lower lows. This was a valid signal, but divergences can be
misleading when a stock is in a stable long-term trend. In that case, numerous divergences can be
seen before a reversal occurs. Using flexible oversold or overbought readings will help identify more
potential signals.
Tradingview

Example of Positive-Negative RSI Reversals

An additional price-RSI relationship that traders watch for is positive and negative RSI reversals.
These are the opposite of bearish and bullish divergences. A positive RSI reversal may take place
once the RSI reaches a lower low at the same time a security's price reaches a higher low. Traders
would consider this formation a bullish sign and a buy signal.

Conversely, a negative RSI reversal may take place once the RSI reaches a high that is higher that its
previous high at the same time that a security's price reaches a lower high. This formation would be
a bearish sign and a sell signal.9

Example of RSI Swing Rejections

Another trading technique examines RSI behavior when it is reemerging from overbought or oversold
territory. This signal is called a swing rejection. A bullish swing rejection has four parts:8

1. The RSI falls into oversold territory.

2. The RSI crosses back above 30.

3. The RSI forms another dip without crossing back into oversold territory.

4. The RSI then breaks its most recent high.

As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and
formed the rejection low that triggered the signal when it bounced higher. Using the RSI in this way is
very similar to drawing trend lines on a price chart.
Tradingview

There is a bearish version of the swing rejection signal that is a mirror image of the bullish version. A
bearish swing rejection also has four parts:

1. The RSI rises into overbought territory.

2. The RSI crosses back below 70.

3. The RSI forms another high without reaching overbought territory.

4. The RSI then breaks its most recent low.

The following chart illustrates the bearish swing rejection signal. As with most trading techniques,
this signal will be most reliable when it conforms to the prevailing long-term trend. Bearish signals
during downward trends are less likely to generate false alarms.
Tradingview

The Difference Between RSI and MACD

The moving average convergence divergence (MACD) is another trend-following

momentum indicator that shows the relationship between two moving averages of a security’s price.
The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-
period EMA. The result of that calculation is the MACD line.

A nine-day EMA of the MACD, called the signal line, is then plotted on top of the MACD line. It can
function as a trigger for buy and sell signals.10 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 was designed to indicate whether a security is overbought or oversold in relation to recent
price levels. It's calculated using average price gains and losses over a given period of time. The
default time period is 14 periods, with values bounded from 0 to 100.11

The MACD measures the relationship between two EMAs, while the RSI measures price change
momentum in relation to recent price highs and lows. These two indicators are often used together
to provide analysts with a more complete technical picture of a market.

Both indicators measure the momentum of an asset. However, they measure different factors and
may sometimes give contradictory indications.

For example, the RSI may show a reading above 70 for a sustained period of time, indicating a
security is overextended on the buy side.At the same time, the MACD could indicate that buying
momentum is still increasing for the security. Either indicator may signal an upcoming trend change
by showing divergence from price (the price continues higher while the indicator turns lower, or vice
versa).

Limitations of the RSI

The RSI compares bullish and bearish price momentum and displays the results in an oscillator
placed beneath a price chart. Like most technical indicators, its signals are most reliable when they
conform to the long-term trend.

True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for
example, would be a bullish crossover followed by a sudden decline in a stock. A false negative would
be a situation where there is a bearish crossover, yet the stock suddenly accelerated upward.

Since the indicator displays momentum, it can stay overbought or oversold for a long time when an
asset has significant momentum in either direction. Therefore, the RSI is most useful in an oscillating
market (a trading range) where the asset price is alternating between bullish and bearish
movements.

What Is a Good RSI Number to Use?

This question could refer to the time frame used in an RSI calculation. Choosing the right RSI period
depends on your trading style, time frame, and market conditions. The default is a 14-period time
frame, which provides a balanced response to price changes and is well-suited to swing and position
trading. Using shorter periods between 5 and 9 makes the RSI more sensitive, appealing to day
traders who want to capture quick momentum shifts, though they tend to generate more noise.
Meanwhile, using longer periods, such as 21 to 30, suits long-term investors looking to capture major
trends.
On the other hand, a "good RSI number" could also refer to RSI levels. When the RSI is below 30, it
signals that the security could be oversold or undervalued — meaning it could be a good time to buy.
When the RSI is above 70, it signals that the security could be overbought or overvalued — meaning
it could be a good time to sell. An RSI of 50 signals a neutral balance between bullish and bearish
positions.

Should I Buy When RSI Is Low?

Some traders consider it a buy signal if a security’s RSI reading moves below 30. This is based on the
idea that the security has been oversold and is therefore poised for a rebound. However, the
reliability of this signal will depend on the overall context. If the security is caught in a significant
downtrend, then it might continue trading at an oversold level for quite some time. Traders in that
situation might delay buying until they see other technical indicators confirm their buy signal.

What Happens When RSI Is High?

As the relative strength index is mainly used to determine whether a security is overbought or
oversold, a high RSI reading can mean that a security is overbought and the price may drop.
Therefore, it can be a signal to sell the security.

What Is the Difference Between RSI and Moving Average Convergence Divergence (MACD)?

RSI and moving average convergence divergence (MACD) are both momentum measurements that
can help traders understand a security’s recent trading activity. However, they accomplish this goal in
different ways.

In essence, the MACD works by smoothing out the security’s recent price movements and comparing
that medium-term trend line to a short-term trend line showing its more recent price changes.
Traders can then base their buy and sell decisions on whether the short-term trend line rises above
or below the medium-term trend line.

What Is the Difference Between RSI Divergence and RSI Reversal?

RSI divergence occurs when the indicator lags behind price, while RSI reversal signals result from
price lagging behind the indicator. Both divergence and reversal signals can be bullish or bearish.

In a bearish divergence, for example, price makes a higher high but the RSI makes a lower high. With
a negative reversal, on the other hand, the RSI makes a higher high, while price makes a lower high.

The Bottom Line

All in all, the RSI is one of the most popular momentum oscillators in technical analysis. It is used to
measure the speed and change of price movements, providing traders insights into potential
overbought and oversold conditions. Calculated using a function of relative strength, the RSI ranges
from 0 to 100. Indeed, the RSI, with its overbought and oversold levels, helps traders spot potential
reversals, divergences, and trend continuations.

RSI Indicator: Buy and Sell Signals

The relative strength index (RSI) is a momentum indicator that measures recent price changes as it
moves between 0 and 100. The RSI provides short-term buy and sell signals and is
used to track the overbought and oversold levels of an asset.

Low RSI levels, below 30, generate buy signals and indicate an oversold or undervalued condition.
High RSI levels, above 70, generate sell signals and suggest that a security is overbought
or overvalued. A reading of 50 denotes a neutral level or balance between bullish and bearish
positions.

The relative strength index (RSI) was introduced in 1978 by technical analyst J. Welles Wilder Jr. in his
book New Concepts in Technical Trading Systems.1

Key Takeaways

 The relative strength index is a momentum indicator that looks at the pace of recent price
changes to determine whether a stock is ripe for a rally or a selloff.

 Market statisticians and traders use the RSI with other technical indicators to identify
opportunities to enter or exit a position.

 When the RSI surpasses the horizontal 30 reference level, it is a bullish sign and when it
slides below the horizontal 70 reference level, it is a bearish sign.

 Divergence occurs when prices move in the opposite direction from an indicator like an
oscillator.

 Failure swings are trend signals that indicate a reversal and can occur during uptrends and
downtrends.

Overbought and Oversold Levels

The term overbought refers to an instance when an asset's trading value is above its fair or intrinsic
value. An overbought asset tends to be indicative of recent or short-term price movements. As such,
there's an expectation that the market will see a correction in the price in the near term. Overbought
assets are generally considered suitable for sale.

The definition of oversold depends, though, on who you ask. Fundamental traders believe that an
asset is oversold when its price is lower than its fair or intrinsic value. Therefore, they trade lower
than their perceived worth. Technical analysts believe oversold assets are those that reach a certain
level on a technical indicator, focusing on price and historical data rather than the asset's value.

When it comes to market analysis and trading signals, the RSI is viewed as a bullish indicator when it
moves above the horizontal 30 reference level.

Conversely, an RSI that dips below the horizontal 70 reference level is viewed as a bearish indicator.
Since some assets are more volatile and move quicker than others, the values of 80 and 20 are also
frequently used levels for overbought and oversold assets.
Image by Sabrina Jiang © Investopedia 2020

Investment values start to drop when demand for overbought assets begins to decline.

Divergence in Price and RSI Oscillator

Divergence is a term used by technical analysts to describe signals of prices that move in the
opposite direction from a technical indicator. Divergence can be either positive or negative, where
positive ones indicate that an asset's price hits a new low as the indicator's value climbs. Negative
ones, on the other hand, take place when the price hits a new high point while the indicator hits a
new low.

In technical analysis, oscillators are used to make high and low banks that exist between two
different extremes. They are momentum indicators that can be used with other indicators to
pinpoint corrections and price breakouts. This tool then fashions a trend indicator, which rises and
falls within these extreme values.

The divergence between the way an asset's price moves and the RSI oscillator may point to the
possibility of a reversal in trends. So when the asset's price reaches a higher high and the RSI reaches
a lower high, the trader can recognize a bearish divergence. A bullish divergence occurs in the
opposite scenario.
Image by Sabrina Jiang © Investopedia 2020

Results from the RSI may be misleading when markets are trending so it should only be used during a
ranging market.

Failure Swings

Trend signals that indicate a reversal are called failure swings. These swings can take place during
uptrends and downtrends, where the former indicates selling activity while the latter represents
buying activity. Failure swings occur when the index oscillator doesn't follow the high point in an
uptrend or a low point in the downtrend.

There are two types of failure swings:

 Failure Swing Top: This type of failure swing occurs when the asset's price reaches a high
point but the relative strength index drops below the most recent fail point (the recent swing
low). When this happens, it indicates a signal to sell the asset.

 Failure Swing Bottom: The failure swing bottom occurs when the asset's price hits the low
point but the RSI jumps above the fail point or the most recent swing high. This indicates a
signal to buy the asset.

Failure swings can be very useful for investors who know how to use them. As such, they can be used
to trade RSI divergences by identifying recent trends in order to spot the signs of trend reversals.
Image by Sabrina Jiang © Investopedia 2020

RSI Ranges

The RSI tends to remain more static during uptrends than it does during downtrends. This makes
sense because the RSI measures gains versus losses. In an uptrend, there are more gains, keeping the
RSI at higher levels. In a downtrend, on the other hand, the RSI tends to stay at lower levels.

Image by Sabrina Jiang © Investopedia 2020

During an uptrend, the RSI tends to stay above 30 and should frequently hit 70. During a downtrend,
it is rare to see the RSI exceed 70, and the indicator frequently hits 30 or drops under this threshold.
These guidelines can help determine trend strength and spot potential reversals.

For example, if the RSI isn't able to reach 70 on a number of consecutive price swings during an
uptrend, but then drops below 30, the trend has weakened and could be reversing lower.

The reverse is true for a downtrend. This means that if the downtrend is unable to reach 30 or below
and then rallies above 70, that downtrend is said to weaken. As such, it could end up reversing to the
upside.

RSI Trendline Breaks

Image by Sabrina Jiang © Investopedia 2020

Momentum Indicators: RSI vs. MACD

Like RSI, the moving average convergence divergence (MACD) is a trend-following

momentum indicator that shows the relationship between two moving averages of a security’s price.
The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-
period EMA. The result of that calculation is the MACD line.

A nine-day EMA of the MACD called the "signal line" is then plotted on top of the MACD line, which
can function as a trigger for buy and sell signals. 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.

Frequently Asked Questions

What Is a Good RSI Indicator?

Traders who are looking for investment opportunities should look for RSI values that hit 30 or fall
below that level. This allows them to look for investment options that may be undervalued where
the price may increase in the future. But it's important for investors to remain steadfast and avoid
making hasty decisions, since market conditions can change at a moment's notice.

Is There a Better Indicator Than the RSI?

The RSI measures how quickly the price of an asset moves. It is commonly used when markets are
trending. But other trade signals can help traders when overbought and oversold asset prices don't
change course right away. For instance, the moving average convergence divergence and moving
average crossovers both allow traders to verify RSI indicators.

What Does It Mean if a Stock Is Overbought?

A stock that is overbought trades at a price above its intrinsic or fair value. This means it doesn't
trade at its true worth. Rather, it's trading at a price that's much higher than what it should be.

What Does It Mean if a Stock Is Oversold?

When a stock is oversold, it trades at a price below its intrinsic value. Put simply, it trades at a price
that's much lower than it should. This means that it's worth much more than the price that it's
trading at in the market.

Relative Strength Index: Calculator & Formula, Best Setting and Strategies
Updated11.11.2024 09Jul.202416:38

Trading the financial markets can seem daunting for beginners. Making sense of RSI charts and
indicators is key to finding profitable opportunities. One of the most useful yet confusing tools for
new Forex traders is the Relative Strength Index RSI. This momentum indicator tracks recent price
action to spot overbought and oversold conditions. Understanding RSI signals can help new traders
better time entries and exits.
This guide will explore the RSI (Relative Strength Index) indicator and its significance in trading. We
will discuss the calculation and formula behind the RSI, explore the concept of the best settings for
this indicator, and delve into various strategies that can be implemented using the RSI.

Whether you are a beginner or an experienced trader, understanding the RSI indicator can provide
valuable insights into market trends and potential trading opportunities. So, let's dive in and explore
this powerful tool for technical analysis.

The article covers the following subjects:

 Major Takeaways:

 RSI Indicator Calculation & Formula

 Set up and custom RSI

 RSI Trading Strategies

 RSI Stock Screener

 Example of successful RSI trading strategy

 Conclusion

 RSI Indicator For Professionals FAQs

Major Takeaways:

 RSI Calculation. The RSI indicator calculates average gains and losses to determine
overbought and oversold conditions.

 Best Settings. Experiment with different time frames and adjust RSI parameters to suit your
trading style.

 Overbought/Oversold Levels. RSI readings above 70 indicate overbought, while readings

below 30 suggest oversold conditions.

 RSI Divergence. Divergence between price and RSI can signal potential trend reversals.

 Confirmation Tool. RSI can be used alongside other indicators or chart patterns for
confirmation.

 RSI Strategies. RSI pullback, trendline break, and divergence strategies can be implemented
for trading opportunities.

RSI Indicator Calculation & Formula

To calculate the RSI indicator, follow these steps.

Step 1:
 Calculate the range of positive and negative changes in the market price action for a specified period.

 Determine whether the period closed up or down based on the current and previous closing prices.

 If the period closed up, calculate the range of positive change as U = Price(i) - Price(i-1), and set D to 0.
  If the period closed down, calculate the range of negative change as D = Price(i-1) - Price(i), and set U to 0.

 If both closing prices are equal, set U and D to 0.

Step 2:

 Calculate the RSI between positive and negative changes. Use a Simple Moving Average (SMA) with a specified period (N) to
smooth the averages of U and D.

 Divide the smoothed average of U by the smoothed average of D to calculate RS. RS is often simplified as the ratio of the
average gain to the average loss.

Step 3:

 Calculate the RSI value using the formula RSI = 100 - (100 /(1 + RS)).

 Plug in the RS value to the formula to determine the RSI value.

 Note that if the denominator D in the RS formula is 0 due to a steadily rising trend, the RSI value will be 100.

Step 4:

Interpret the RSI value. RSI values above 70 are considered overbought, while values below 30
indicate oversold conditions.

RSI Calculation Excel Sheet

The RSI Calculation Excel Sheet is a tool for technical analysis that helps traders determine the
strength of a security's price action. It calculates the Relative Strength Index (RSI) and allows users to
plot the values on a diagram for easier interpretation.

Set up and custom RSI

While most trading platforms come with default RSI settings, customizing it can help traders tailor
their analysis to their individual needs. Setting up a custom RSI may seem daunting, but it's like
adding toppings to a pizza - you can choose which ones you want to use based on your preferences.

Using the RSI indicator in the trading terminal

To get started, let's install the RSI indicator in the LiteFinance trading terminal.

RSI Trading Strategies

Here are six different RSI trading strategies that you can use to help you make better trading
decisions:

1. Breakout Trading Strategy

This strategy involves drawing horizontal and diagonal levels based on the oscillator reference points.
These levels help you identify potential breakout points in advance. Once the RSI indicator sends an
early signal, you can use these levels to enter trades when the breakout occurs.

2. Overbought/Oversold (OBOS) Trading Strategy

The OBOS trading strategy suggests looking for trend pivot points when the market becomes
overheated. There is an imbalance of buy or sell orders. When the RSI line goes above 70, it's
considered overbought, and you should avoid buying the asset. Conversely, when the RSI line goes
below 30, it's considered oversold, and you should avoid selling the asset.

3. Divergence Trading Strategy

This strategy involves looking for bullish or bearish divergences between the RSI line and the price
chart. A bullish divergence occurs when the asset price makes new lows, but the RSI indicator makes
higher lows. This indicates that the downtrend may be losing momentum, and a reversal could occur.
A bearish divergence occurs when the asset price consistently makes new highs, but the RSI fails to
do so, suggesting that the uptrend is losing momentum and that a reversal could be imminent.

4. Failure Swing Trading Strategy

The failure swing trading strategy is based on an M or W pattern formation on the RSI line. When this
pattern occurs, it indicates that there is still some buying pressure in the market despite the price
decline, and the price is likely to continue going up.

5. Cardwell's Trend Confirmations Trading Strategy

Cardwell's trend confirmation strategy involves using RSI levels shifted in the price trend line's
direction. You should enter trades when the RSI indicator reverses and rebounds from strong levels.
The levels for an uptrend are 40 and 80, while the levels for a downtrend are 20 and 60.

6. Cardwell's Positive and Negative Reversals Trading Strategy

This strategy is similar to divergence trading, but it's focused on positive and negative reversals.
Positive reversals occur when the RSI indicator makes a higher low while the asset price makes a
lower low, indicating that the downtrend is losing momentum. Negative reversals occur when the RSI
indicator makes a lower high while the asset price makes a higher high, indicating that the uptrend is
losing momentum.

It's important to note that the RSI indicator has some limitations, including the fact that the signals
can be lagging, and the indicator may be repainted. As such, it's recommended to use RSI in
combination with other technical indicators to seek investment advice and always practice proper
risk and trading strategies techniques.

Potential Buy & Sell Signals

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.
In the RSI chart above, the reference points of the indicator, marked with red ovals, correspond with
level 30. When the indicator breaks through level 30, it generates a trading signal. However, this is an
early signal, and graphical analysis suggests entering the trade at the point marked with the green
circle.

Note that for potentially better results, it’s recommended to zoom out the chart to get a clearer view
of the bigger picture and trade in short-term timeframes, like 15 or 30 minutes.

Overbought — Oversold (OBOS) Levels

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. When
the RSI line reverses in these zones, it could signal a change in the trend direction or a deep price
correction. However, the trend may also go sideways, meaning there may not be any significant price
movements.

To find an entry point for trading, look for when the RSI line goes back to the default range. There are
two types of signals to watch for:
1. An early signal happens when the RSI turns up in the oversold territory or down in the overbought
levels.

2. A primary signal happens when the RSI breaks out of level 70 from the top downward, indicating a
sell signal, or if it breaks level 30 from the bottom upward, indicating a buy trade.

It's important to not strictly follow the default parameters of 30 and 70. Instead, use the 5% rule.
This means finding the extreme values of the RSI for the past three months on the daily timeframe
and determining if it's overbought or oversold territory for more than 5% of that time.

For example, if the RSI hasn't entered the oversold territory in the past three months, you can set a
custom overbought level, say 76, on your trading chart time frame. You can then enter trades based
on the same principle of waiting for the RSI to break through the strong level when it goes outside
the overbought or oversold levels.
RSI Divergences

Divergence happens when the RSI and the price chart are moving in opposite directions. This can be
a sign that a trend is about to change. There are two types of divergence:

 Bullish RSI divergence happens when the price goes down, but the RSI goes up.

 Bearish RSI divergence happens when the price is going up, but the RSI is going down.

If you see a bullish divergence, it could mean that the price is about to go up. If you see a bearish
divergence, it could mean that the price is about to go down.

You can learn more about the divergence in this overview. RSI divergence looks like this in the chart:

When using the RSI, it's important to pay attention to the overbought and oversold zones. When the
RSI is in the overbought zone (very high), it means that the price might be due for a correction or
reversal. When the RSI is in the oversold zone (very low), it means that the price might be oversold
and due for a bounce back up.
RSI Failure Swing: Bullish & Bearish

RSI can effectively be used with Failure Swing patterns to help traders identify potential buying or
selling opportunities. The Failure Swing involves the RSI line attempting to break through a previous
high or low but failing to do so. Instead, it turns back towards the median level.

The Failure Swing pattern can take on different shapes when the RSI is in the overbought or oversold
zone. For example, in the overbought zone, it looks like an "M," while in the oversold zone, it looks
like a "W." 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. The oscillator line then attempts
to test the first high (or low) again, but it fails to reach the same level, creating a lower high (or
higher low) that's not as clear as the first. This failure to repeat the high (or low) is a sign that buyers
or sellers are losing strength.
If the RSI forms in the overbought zone and a Failure Swing pattern occurs, it could be a signal to sell
or go short. Conversely, if the RSI is in the oversold zone and a Failure Swing pattern forms, it could
be a signal to buy or go long. However, it's important to use additional indicators to confirm these
signals and to pay attention to the trend of the market as a whole.

Cardwell’s trend confirmations

Cardwell's RSI reading trading strategy offers a different approach compared to Wilder's. In a
nutshell, Cardwell suggests using different signal levels, 40 and 80 for uptrends and 20 and 60 for
downtrends. According to him, a strong uptrend will not retrace to the RSI overbought zone, while a
strong downtrend won't reach the RSI oversold zone. This means that the RSI indicator line should
mostly move between the support and resistance levels of 40 and 60. Cardwell's trend confirmation
happens when the price rebounds from these levels.

Cardwell suggests that when the RSI line is between the support and resistance levels of 40 and 60, it
indicates a trend confirmation. In a bull market trend, the indicator line stays mostly between the
levels of 40 and 80, with level 40 being a strong support level. On the other hand, in a bear market
trend, the indicator line stays mostly between the levels of 20 and 60, with level 60 being a strong
resistance level.

Let's look at an example. If the indicator line is mostly between the levels of 40 and 80, and the price
bounces up from level 40, it's a strong signal to open a long position in a bullish trend. 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.
Similarly, if the indicator line is mostly between the levels of 20 and 60, and the price bounces down
from level 60, it's a strong signal to enter a short trade in a bearish trend.

Positive & Negative Reversals

The positive and negative reversals technique is based on the divergences and was also introduced
by Cardwell.

Positive reversals occur when the next low in an uptrend is higher than the previous low, and the
next low of the Relative Strength Index (RSI) is lower than the previous correction. Despite the
divergence between the price and oscillator movements, the price continues moving upwards after a
brief decline, which is called inverse divergence. On the other hand, negative reversals happen when
the indicator forms a higher high and the price forms a lower high, resulting in a continued market
decline.
Note that positive and negative reversals are used to trade in the opposite direction of the price
movement. For example, if the price is going up, but the oscillator line is moving down, it's likely that
the price will jump up. Conversely, if the price is going down, but the oscillator line is moving up, the
price will likely fall.

RSI Stock Screener

A stock screener is an analytical platform that offers a range of filters to sort and group shares based
on specific parameters. One of the parameters that investors can use to filter stocks is technical
indicators such as the RSI stock indicator. By identifying securities that are currently overbought or
oversold, investors can conduct a deeper analysis to determine whether it is profitable to buy or sell
a particular stock.

Read a detailed overview of screeners here.

There are different examples of screeners that investors can use, such as Investing or Finviz.
Example of successful RSI trading strategy

Let’s see a trading forex example using the EURZAR currency pair in the M5 timeframe.
Analyzing the above chart of the forex market, it’s possible to note that the price had broken through
a strong resistance level in a downtrend and hadn't fallen so deep for more than ten days. This
indicated that the price was likely to reverse soon, especially since the RSI with a period of 14 and
signal levels of 30 and 70 was suitable for trading this pair.

If you look closer at the chart, it’s possible to notice a W-shaped failure swing pattern forming. This
confirms that the price is going to reverse soon. You can wait until the indicator line breaks out level
30 from below and enter a trade.
Now it’s necessary to decide when to close the position. In this case, we can see that a trader
chooses to exit the trade at the first sign of a trend reversal to avoid risks.

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.
This is an example of a scalping strategy that yielded a small profit quickly. But keep in mind that
there are other popular technical analysis tools you can use with the RSI, such as channel indicators
or graphical analysis. You can even combine the RSI in your retail investor accounts with other
oscillators like the CCI and stochastic for even more accurate signals.

Conclusion

The RSI indicator is a powerful tool for traders, providing insights into market conditions, trend
reversals, and potential trading opportunities. Traders can effectively utilize the RSI in their technical
analysis by understanding its calculation, best settings, and interpretation of overbought and
oversold levels. Additionally, the concept of RSI divergence and its role as a confirmation tool further
enhances its usefulness. Implementing various RSI-based trading strategies allows traders to
capitalize on price movements and optimize their trading decisions. However, it is important to
remember that the RSI should be used in conjunction with other analysis techniques and risk
management strategies to make well-informed trading choices.

RSI Indicator For Professionals FAQs

What is the 5-star RSI strategy?

“5-star” is a high rating trading strategy, it combines RSI and other technical indicators with
fundamental analysis to find optimal entry and exit points, for example, on trend reverse. 5-star RSI
strategy can be used in trading Forex, stock and cryptocurrency and other markets.

Can RSI be used for swing trading?

Yes, RSI can be used for swing trading. It helps identify overbought and oversold conditions, which
are used to time entry and exit points for swing trades. Combining RSI with other analysis techniques
is recommended for better accuracy.
Does RSI work on a 5-minute chart?

Yes, RSI can be used on a 5-minute chart or any other time frame. However, shorter time frames may
have more noise and false signals. Adjusting RSI parameters and using additional tools can help filter
out false signals.

What time frame is best for RSI?

The best time frame for RSI depends on trading style and preferences. Shorter time frames provide
more frequent signals but may be more volatile. Longer time frames offer a broader perspective for
identifying longer-term trends. Testing different time frames is recommended to find what works
best for your strategy.

Interested in using the Relative Strength Index to improve your trading

strategy? This introductory guide will teach you what the RSI is, how to interpret its signals and
insights into using RSI in different market conditions.

The Relative Strength Index (RSI) is a popular and powerful tool used by traders for technical analysis.
Even with many new indicators available, the RSI stands out because it's simple to use, has been
around for a long time and works well. In this guide, we'll explain what RSI is and the best way to
interpret and use it. Please note, this is not financial advice but an explanation of the mechanisms
behind the RSI and its application in trading.

What is the Relative Strength Index (RSI)?

The Relative Strength Index, or RSI, is a momentum oscillator that measures the speed and change of
price movements. Developed by J. Welles Wilder Jr, the RSI was introduced in his book New Concepts
in Technical Trading Systems in 1978.

The RSI is displayed as an oscillator that is visible on a separate window of the chart. The indicator is
bound between 0 and 100 and assists traders by raising awareness that an asset is potentially trading
in overvalued or undervalued territory based on recent price movements.

Think of the RSI as a speedometer for a stock or asset. It helps market participants see how quickly
the price is changing and how the average gains compare to the average losses.

What is the Formula for Calculating the RSI?

The RSI is calculated using a pretty straightforward formula:

RSI = 100 - (100 / (1 + RS))

Where RS (Relative Strength) is the Average gain of up periods during the specified time frame divided by the Average loss of down periods
during the specified time frame.

RS = Average Gain/Average Loss

Average gain: sum of gains over X periods/X

Average loss: sum of losses over X periods/X

The X is typically set to 14 periods by default, but you can tweak it to fit your trading style, something we will cover further into this article.

Fortunately, the charting packages on most trading platforms perform these calculations
automatically so you don’t have to.

How to Use the RSI?

The Relative Strength Index (RSI) measures the speed and size of price movements on a scale from 0
to 100. Think of it as a speedometer for market momentum. When the RSI is above 70, it signals that
prices might be overbought or overvalued. Conversely, when an asset's RSI falls below 30, it indicates
that the asset may be oversold or undervalued. Market participants use these signals as warnings, as
they often precede price retracements.

It's important to note that prices can still rise in the "overbought" zone or fall in the "oversold" zone.
Therefore, combining RSI with other indicators can improve accuracy and success rates.

A common mistake traders make is to buy or sell immediately when the RSI enters an overbought or
oversold territory. A better approach is to wait until the RSI crosses back below 70, indicating a
potential shift in momentum from buyers to sellers.

Example of the RSI Behavior in “Overbought/Overvalued” Territory

Source: TradingView.com

Below we have an example of the RSI behavior when it is in “Oversold/Undervalued” territory.

Source: TradingView.com

The neutral zone around 50 indicates a balanced market, akin to a “Goldilocks” scenario—not too
bullish or bearish. When the value exceeds 50, it suggests that gains are outpacing losses, hinting at
an upward trend. Conversely, a value below 50 indicates that losses are surpassing gains, signaling a
downward trend. Although the Relative Strength Index (RSI) is not flawless, it serves as a valuable
instrument for spotting potential market movements.

How to Use the RSI for Trend Identification?

The RSI is helpful for market participants in identifying trends. In a strong uptrend, the RSI typically
stays between 40 and 90, with the 40-50 range acting as support. In a strong downtrend, the RSI
ranges from 10 to 60, with the 50-60 range serving as resistance.

The centerline of the RSI, marked at 50, is crucial for trend identification. When the RSI crosses above
50, it indicates a bullish trend; crossing below 50 signals a bearish trend.

Source: TradingView.com
In a downtrend, an RSI that peaks and fails to rally above the 50-60 level implies the continuation of
the trend. Traders can draw trendlines on the RSI chart, which helps to highlight the market’s trend
direction and signals potential breakouts when the RSI breaks through these lines.

The retracements towards the RSI 50-60 level is not necessarily used as confirmation of a potential
trade setup but may be used by market participants in determining when to exit a position. It is
important to note that a break above the 50-60 level on the RSI is a sign of shifting momentum and a
potential trend change from a downtrend to an uptrend.

Looking at the chart example below, the moment the RSI broke above the green block we saw a
change in trend.

Source: TradingView.com

RSI Settings and How to Adjust Them

Traditionally the RSI adopts a 14 period setting which means it looks at price changes over the last 14
trading periods. Now, I say periods because if you are using a daily chart the RSI would represent the
last 14 days but on a 1-hour chart the RSI setting will correspond to 14 one-hour candlesticks.

This is the most popular setting because it strikes a good balance between being responsive and
dependable for general market analysis. It is effective for most trading strategies and timeframes.

Adjusting the RSI Settings and Parameters

Adjusting the RSI settings can help tailor the indicator to different trading styles and timeframes. The
standard overbought and oversold levels of 70 and 30 are just guidelines and not strict rules. Some
traders adjust these levels based on their risk tolerance or the market's volatility. It's about finding
what works best for you and your strategy.

For instance, in a very volatile market, you might raise the overbought level to 80 or 90 to stay in
trades longer. In a calmer market, you could lower the oversold level to 20 or 10 to spot potential
reversals sooner.
The standard RSI calculation typically uses a 14-period time frame, but you can adjust this to better
suit your trading horizon. Using a shorter period, like 9 or 7, will make the RSI more responsive to
recent price changes.

Examples of this are as follows:

1. Shorter Periods
Another popular setting used is 7 or at times 9 as well. By shortening the number of periods,
the RSI becomes more sensitive and thus provides more signals. Usually preferred by those
seeking a day trading approach. The downside to this is that you market participants may
end up receiving a lot more false signals.

2. Longer Periods
Increasing the number of periods makes the RSI less reactive, which smooths out the
indicator and reduces the number of signals. This is helpful for long-term traders or investors
who want to ignore short-term market fluctuations and concentrate on stronger trends. The
more popular used settings are 14 or 21.

The chart below provides a view of the EUR/USD H1 chart with the RSI on a period 7 and period
14. As you can see the RSI period 7 is a lot more responsive to price changes.

Source: TradingView.com

Advantages of the RSI

The Relative Strength Index (RSI) is a popular momentum oscillator that offers several advantages for
trading financial markets:

1. Simplicity: The RSI's simplicity stems from its clear and concise signals, as well as its ease of
interpretation.

2. Identifying Overbought and Oversold Conditions: It remains one of the simplest methods to
alert traders to focus on a particular asset. When an asset enters the overbought or oversold
zones around 70 and 30, it is easy to notice when the RSI reverses out of these zones,
indicating a shift in momentum.
 3. Divergence Detection: The RSI can indicate when price and momentum are misaligned. If the
RSI increases while the price decreases, it signals a bullish divergence. Conversely, if the RSI
decreases while the price increases, it signifies a bearish divergence.

Disadvantages of the RSI

The RSI has many advantages but as traders you have to make sure you understand the limitations
and disadvantages that crop up.

1. False Signals/Counter Trend Trading: In trending market conditions, the RSI can stay in the
overbought or oversold zones for extended periods. This means that the overbought and
oversold levels don't necessarily provide reliable signals, as taking a trade while the RSI is in
these zones could result in a "false signal" due to trading against the trend.

2. It is a Lagging Indicator: It's important to remember that the RSI is a lagging indicator. This
means it may not provide the most timely signals, particularly in fast-moving markets. By the
time the RSI responds, the opportunity might have already passed. Therefore, patience is
crucial, and waiting for the right setups is essential.

Overall, the RSI indicator is a valuable tool for traders seeking to analyze market momentum and spot
potential trading opportunities. However, it's crucial to remember that RSI should not be used alone
and should be combined with other forms of analysis for more informed decision-making.

Relative Strength Index (RSI)

Explore the Relative Strength Index (RSI) and its pivotal role in technical analysis. Learn
how RSI measures price momentum and identifies overbought or oversold conditions.

What Is the Relative Strength Index (RSI)?

The RSI, a momentum oscillator developed by J. Welles Wilder, measures the speed and
change of price movements. The RSI moves up and down (oscillates) between zero and 100.
When the RSI is above 70, it generally indicates overbought conditions; when the RSI is
below 30, it indicates oversold conditions. The RSI also generates trading signals via
divergences, failure swings, and centerline crossovers. You could also use the RSI to identify
the general trend.

RSI is a popular momentum indicator that has been featured in a number of articles,
interviews, and books over the years. In particular, Constance Brown's book, Technical
Analysis for the Trading Professional, features the concept of bull and bear market ranges for
RSI. Andrew Cardwell, Brown's RSI mentor, introduced positive and negative reversals for
RSI and turned the notion of divergence, literally and figuratively, on its head.

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.
Calculating the RSI

100
RSI = 100 - --------
1 + RS

RS = Average Gain / Average Loss

There are three basic components in the RSI—RS, Average Gain, and Average Loss. This RSI calculation is based on 14 periods, the
default Wilder suggested in his book. Losses are expressed as positive values, not negative values.

The first calculations for average gain and average loss are simple 14-period averages:

 First Average Gain = Sum of Gains over the past 14 periods / 14.
 First Average Loss = Sum of Losses over the past 14 periods / 14.

The second and subsequent, calculations are based on the prior averages and the current gain loss:

 Average Gain = [(previous Average Gain) x 13 + current Gain] / 14.

 Average Loss = [(previous Average Loss) x 13 + current Loss] / 14.

Taking the prior value plus the current value is a smoothing technique similar to calculating an exponential moving average. This also
means RSI values become more accurate as the calculation period extends. SharpCharts uses at least 250 data points before the starting date
of any chart (assuming that much data exists) when calculating its RSI values. A formula will need at least 250 data points to replicate our
RSI numbers.

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. When the Average Gain equals zero, RSI is zero. So, if you're using a 14-period RSI, a
zero RSI value means prices moved lower in all 14 periods. There were no gains to measure. RSI is 100 when the Average Loss equals zero.
This means prices moved higher in all 14 periods, and there were no losses to measure.

Chart 1 - RSI RS Plots

Note: The smoothing process affects RSI values. RS values are smoothed after the first
calculation. Average Loss equals the sum of the losses divided by 14 for the first calculation.
Subsequent calculations multiply the prior value by 13, add the most recent value, and divide
the total by 14. This creates a smoothing effect. The same applies to Average Gain. Because
of this smoothing, RSI values may differ based on the total calculation period. 250 periods
will allow for more smoothing than 30 periods, which will slightly affect RSI values.
StockCharts.com goes back 250 days whenever possible. If the Average Loss equals zero, a
“divide by zero” situation occurs for RS, and RSI is set to 100 by definition. Similarly, RSI
equals 0 when Average Gain equals zero.

What Are the Best RSI Parameters?

The default look-back period for RSI is 14, but you can lower it to increase sensitivity or
raise it to decrease sensitivity. A 10-day RSI is more likely to reach overbought or oversold
levels than a 20-day RSI. The look-back parameters also depend on a security's volatility.
The 14-day RSI for a volatile stock such as Amazon (AMZN) is more likely to become
overbought or oversold than a 14-day RSI for a utility company such as Duke Energy (DUK).

The traditional overbought and oversold levels can be adjusted to better fit the security or
analytical requirements. Raising the overbought threshold to 80 or lowering the oversold
threshold to 20 could reduce the number of overbought/oversold readings. Short-term traders
sometimes use 2-period RSI to look for overbought readings above 80 and oversold readings
below 20.

Overbought and Oversold RSI Levels

Wilder considered RSI overbought above 70 and oversold below 30. Chart 3 shows
McDonalds with 14-day RSI. This chart features daily bars in gray with a one-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).

Notice that the bottom evolved after the oversold reading. 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.

Three more overbought readings occurred before the stock finally peaked in December (2).
Momentum oscillators can become overbought (oversold) and remain so in a strong up
(down) trend. The first three overbought readings foreshadowed consolidations. The fourth
coincided with a significant peak. RSI then moved from overbought to oversold in January.
The stock ultimately bottomed around 46 a few weeks later (3); the final bottom did not
coincide with the initial oversold reading.
Chart 3 - RSI Overbought Oversold

Like many momentum oscillators, overbought and oversold readings for RSI work best when
prices move sideways within a range. Chart 4 shows MEMC Electronics (WFR) trading
between 13.5 and 21 from April to September 2009. The stock peaked soon after RSI reached
70 and bottomed soon after the stock reached 30.
Chart 4 - RSI Overbought Oversold

Bullish and Bearish Divergences in RSI

According to Wilder, divergences signal a potential reversal point because directional
momentum does not confirm price. A bullish divergence occurs when the underlying security
makes a lower low, and RSI forms a higher low. RSI does not confirm the lower low, and this
shows strengthening momentum. A bearish divergence forms when the security records a
higher high and RSI forms a lower high. RSI does not confirm the new high and this shows
weakening momentum.

Chart 5 shows Ebay (EBAY) with a bearish divergence in August–October. The stock moved
to new highs in September–October, but RSI formed lower highs for the bearish divergence.
The subsequent breakdown in mid-October confirmed weakening momentum.

Chart 5 - RSI Divergences

A bullish divergence formed in January–March. The bullish divergence formed with eBay
moving to new lows in March and RSI holding above its prior low. RSI reflected less
downside momentum during the February-March decline. The mid-March breakout
confirmed improving momentum. Divergences tend to be more robust when they form after
an overbought or oversold reading.
Before getting too excited about divergences as great trading signals, it must be noted that
divergences are misleading in a strong trend. A strong uptrend can show numerous bearish
divergences before a top materializes.

Conversely, bullish divergences can appear in a strong downtrend, yet the downtrend
continues. Chart 6 shows the SPDR S&P 500 ETF (SPY) with three bearish divergences and
a continuing uptrend. These bearish divergences may have warned of a short-term pullback,
but there was clearly no major trend reversal.

Chart 6 - RSI Divergences

RSI Failure Swings

Wilder also considered failure swings as strong indications of an impending reversal. Failure
swings are independent of price action, focusing solely on RSI for signals and ignoring the
concept of divergences. A bullish failure swing forms when RSI moves below 30 (oversold),
bounces above 30, pulls back, holds above 30 and then breaks its prior high. It is basically a
move to oversold levels and then a higher low above oversold levels. Chart 7 shows Research
in Motion (RIMM) with 10-day RSI forming a bullish failure swing.
Chart 7 - RSI Failure Swing

A bearish failure swing forms when RSI moves above 70, pulls back, bounces, fails to exceed
70, and then breaks its prior low. It is a move to overbought levels, followed by a lower high
beneath those levels. Chart 8 shows Texas Instruments (TXN) with a bearish failure swing in
May–June 2008.

Chart 8 - RSI Failure Swing

How To Use RSI To Identify Trends In Technical Analysis for the
Trading Professional, Constance Brown suggests that oscillators do not travel between 0 and
100. This also happens to be the name of the first chapter. 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 40–50 zones acting as support. These ranges may vary depending on RSI
parameters, strength of trend and volatility of the underlying security. Chart 9 shows 14-week
RSI for SPY during the bull market from 2003 until 2007. RSI surged above 70 in late 2003
and then moved into its bull market range (40–90). There was one overshoot below 40 in July
2004, but RSI held the 40–50 zone at least five times from January 2005 until October 2007
(green arrows). In fact, notice that pullbacks to this zone provided low risk entry points to
participate in the uptrend.

On the flip side, RSI tends to fluctuate between 10 and 60 in a bear market (downtrend) with
the 50-60 zone acting as resistance. Chart 10 shows 14-day RSI for the US Dollar Index
($USD) during its 2009 downtrend. RSI moved to 30 in March to signal the start of a bear
range. The 50–60 zone subsequently marked resistance until a breakout in December.
Identifying Positive and Negative Reversals With RSI
Andrew Cardwell developed positive and negative reversals for RSI, which are the opposite
of bearish and bullish divergences. Cardwell's books are out of print, but he offers seminars
detailing these methods. Cardwell's interpretation of divergences differs from Wilder's.
Cardwell considered bearish divergences to be bull market phenomena. In other words,
bearish divergences are more likely to form in uptrends. Similarly, bullish divergences are
considered bear market phenomena and are indicative of a downtrend.

A positive reversal forms when RSI forges a lower low, and the security forms a higher low.
This lower low is not at oversold levels but is usually between 30 and 50. Chart 11 shows
MMM with a positive reversal forming in June 2009. MMM broke resistance a few weeks
later, and RSI moved above 70. Despite weaker momentum with a lower low in RSI, MMM
held above its prior low and showed underlying strength. In essence, price action overruled
momentum.

Chart 11 - RSI Reversals

A negative reversal is the opposite of a positive reversal. RSI forms a higher high, but the
security forms a lower high. Again, the higher high is usually just below overbought levels in
the 50-70 area. Chart 12 shows Starbucks (SBUX) forming a lower high as RSI forms a
higher high. Even though RSI forged a new high and momentum was strong, the price action
failed to confirm as lower high formed. This negative reversal foreshadowed the big support
break in late June and sharp decline.
Chart 12 - RSI Reversals

The Bottom Line

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 help understand the indicator, the work of Brown and
Cardwell takes RSI interpretation to a new level. But adjusting to this level takes some
rethinking.

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. Even though the concept of positive
and negative reversals may seem to undermine Wilder's interpretation, the logic makes sense.
Wilder would hardly dismiss the value of putting more emphasis on price action. 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.

Using RSI in SharpCharts

RSI is available as an indicator for SharpCharts. 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.

Chart 13 - RSI SharpCharts

Chart 14 - RSI SharpCharts

Recommended RSI Scans

RSI Oversold in Uptrend
This scan reveals stocks that are in an uptrend with oversold RSI. First, stocks must be above
their 200-day moving average to be in an overall uptrend. Second, RSI must cross below 30
to become oversold.
[type = stock] AND [country = US]
AND [Daily SMA(20,Daily Volume) > 40000]
AND [Daily SMA(60,Daily Close) > 20]

AND [Daily Close > Daily SMA(200,Daily Close)]

AND [Daily RSI(5,Daily Close) <= 30]

RSI Overbought in Downtrend

This scan reveals stocks that are in a downtrend with overbought RSI turning down. First,
stocks must be below their 200-day moving average to be in an overall downtrend. Second,
RSI must cross above 70 to become overbought.
[type = stock] AND [country = US]
AND [Daily SMA(20,Daily Volume) > 40000]
AND [Daily SMA(60,Daily Close) > 20]

AND [Daily Close < Daily SMA(200,Daily Close)]

AND [Daily RSI(5,Daily Close) >= 70]

For more details on the syntax to use for RSI scans, please see our Scanning Indicator Reference in the
Support Center.

RSI FAQs
Yes, on the StockCharts charting platforms, the RSI can added to charts any timeframes—
daily, weekly, hourly, and minute charts. The best timeframe to use it depends on your
trading strategy and goals.

While the RSI can provide valuable insights, using it as a standalone indicator is generally
not recommended. It's usually more effective when combined with other tools and indicators
to confirm signals and avoid potential false alarms.

The RSI can provide useful insights in non-trending or sideways market conditions. It can
identify potential overbought and oversold conditions, which might indicate forthcoming
price swings even in a range-bound market.

What is Relative Strength Index (RSI) Indicator?

Get to grips with the relative strength index (RSI), a vital momentum indicator used in technical
analysis to assess the market momentum of an asset and understand if it has been overbought or
oversold.

Table of Contents

1. How Relative Strength Index Indicator Works

2. The RSI calculation

3. Overbought and oversold

 4. RSI with Trends

5. RSI Divergence Indicator

6. Failure swings

7. Interpretation of RSI and RSI Ranges

8. Differences between MACD and RSI Indicator

9. Advantages of RSI Indicator

10. Disadvantages of RSI Indicator

The relative strength index (RSI) is a technical trading system used by traders and investors to analyse
price movements of a stock or asset. This indicator measures the strength of an asset’s price
movement by comparing the average gains to the average losses over a certain period of time,
typically 14 days.

The RSI is plotted on a price chart and ranges from 0 to 100. When the RSI is above 70, the asset is
considered overbought, and when it’s below 30, it’s considered oversold. Traders use these levels as
potential signals to buy or sell the asset.

One important aspect of the RSI is when a bullish divergence occurs. This is when the price chart
shows a lower low, but the RSI shows a higher low. This can indicate that the price may reverse and
move upwards, providing a buying opportunity.

Overall, the RSI is a useful tool for traders and investors to identify potential trends and market
movements. It can provide valuable insights into an asset’s price movements, helping to inform
decision-making when buying or selling.

How Relative Strength Index Indicator Works

The Relative Strength Index (RSI) is a popular technical analysis tool used to measure the strength of
a security’s price movement. It is a momentum oscillator that compares the magnitude of a
security’s recent gains to the magnitude of its recent losses, indicating whether the asset is
overbought or oversold.

The RSI values range from 0 to 100, where an RSI value of 70 or higher indicates an overbought
condition and a value of 30 or lower suggests an oversold condition. The RSI is calculated using a
formula that takes into account the average gains and losses of a stock over a certain period of time.
Traders use the RSI to identify potential trend reversals by looking for bearish and bullish
divergences. A bearish divergence occurs when the RSI is making lower highs while the price of the
security is making higher highs. This suggests that the price movement is losing strength and could
be due for a reversal. Conversely, a bullish divergence occurs when the RSI is making higher lows
while the price of the security is making lower lows, indicating that the price may soon reverse to the
upside.

Moreover, the RSI can also help traders determine whether an asset is overbought or oversold, which
can be useful for identifying potential entry or exit points. For example, an RSI value above 70
suggests that the security is overbought and could be due for a price correction. On the other hand,
an RSI value below 30 suggests that the asset is oversold and may be due for a rebound.

Overall, the Relative Strength Index is a versatile tool that can help traders identify potential trend
reversals, as well as overbought and oversold conditions. By keeping an eye out for bearish and
bullish divergences and monitoring RSI values, traders can make more informed trading decisions
and potentially increase their profits.bullish divergences

The RSI calculation

To calculate RSI, you need to determine the average gain and average loss of a security over a given
time period. The most commonly used time period for RSI is 14 days, but this can be adjusted based
on a trader’s preferences.

To calculate the average gain and average loss, you need to determine the price change of the
security over the specified time period. If the price of the security increases, this is considered a gain,
and if it decreases, it is considered a loss. Once you have determined the gains and losses, you can
calculate the average gain and average loss using the following formula:

Average Gain = (Sum of Gains over the specified time period) / (Number of periods in the specified
time period)

Average Loss = (Sum of Losses over the specified time period) / (Number of periods in the specified
time period)

Once you have calculated the average gain and average loss, you can use these values to calculate
the RSI using the following formula:

RSI = 100 – (100 / (1 + (Average Gain / Average Loss)))

The RSI measures the strength of a security’s price action on a scale of 0-100, with readings above 70
indicating overbought conditions, and readings below 30 indicating oversold conditions. Traders use
overbought and oversold levels to determine when to enter or exit a trade.
For example, let’s say you want to calculate the RSI of a stock over the past 14 days. The stock has
had gains of $10, $8, $6, $12, $5, $7, $11, $9, $4, $2, $1, $3, $5, and $2 over the past 14 days, and
losses of $0, $1, $2, $0, $3, $2, $1, $3, $5, $6, $8, $7, $4, and $3 over the same period.

To calculate the average gain, you would add up the gains and divide by 14:

Average Gain = (10 + 8 + 6 + 12 + 5 + 7 + 11 + 9 + 4 + 2 + 1 + 3 + 5 + 2) / 14 = 5.5

To calculate the average loss, you would add up the losses and divide by 14:

Average Loss = (0 + 1 + 2 + 0 + 3 + 2 + 1 + 3 + 5 + 6 + 8 + 7 + 4 + 3) / 14 = 3.14

Using these values, you can calculate the RSI:

RSI = 100 – (100 / (1 + (5.5 / 3.14))) = 63.45

With an RSI of 63.45, the stock is not currently in overbought or oversold conditions, but traders may
use this information to make decisions about entering or exiting a trade.

Overbought and oversold

When it comes to technical analysis in trading, the Relative Strength Index (RSI) is a popular indicator
used to measure the momentum of a security’s price movements. The RSI oscillates between 0 and
100, with readings above 70 considered overbought and readings below 30 considered oversold.

An overbought condition in the RSI suggests that security has experienced a sharp price increase and
may be due for a pullback or correction. In contrast, an oversold or undervalued condition indicates
that a security’s price has fallen significantly and may be due for a rebound. It’s important to note,
however, that overbought and oversold readings on the RSI do not necessarily mean that a security’s
price will immediately reverse its course.

Traders can use the RSI to identify potential failure swings, which occur when the RSI forms two
peaks above the 70 level (indicating overbought conditions) with a trough between them that
remains above the 30 level (indicating that the security is not yet oversold). A failure swing suggests
that the bearish price momentum is increasing and that a reversal may be imminent.

Overall, the RSI is a useful tool for traders to help identify overbought and oversold securities and
potential market trends. However, it’s essential to remember that no indicator is perfect, and traders
should always use additional analysis and risk management techniques to make informed
trading decisions.
RSI with Trends

One way to use RSI is to look for RSI divergences. This occurs when the price of an asset and the RSI
indicator are moving in opposite directions. For example, if the price of an asset is making higher
highs, but the RSI is making lower highs, this is a bearish divergence, which may signal a potential
trend reversal. Conversely, if the price is making lower lows, but the RSI is making higher lows, this is
a bullish divergence, which may indicate a potential trend reversal to the upside.

Another way to use RSI is in conjunction with technical trading systems. Traders may use RSI in
combination with other technical indicators, such as moving averages or trend lines, to confirm or
validate their trading signals. For example, if the RSI indicates that an asset is oversold and the price
is bouncing off a key support level, this may signal a potential buying opportunity for traders who
follow a trend-following trading system.
RSI Divergence Indicator

The RSI divergence indicator works by comparing the current price of a security with the RSI
readings. If the price is making higher highs, but the RSI is making lower highs, this is called a bearish
divergence. On the other hand, if the price is making lower lows, but the RSI is making higher lows,
this is called a bullish divergence.

These divergences can indicate that the momentum of the price is starting to weaken, and a reversal
may be imminent. The RSI divergence indicator is particularly useful for traders who use technical
analysis to make their trading decisions, as it provides a clear signal that the trend may be changing
direction.

It’s important to note that the RSI divergence indicator should not be used in isolation, as other
technical indicators and analysis should be used to confirm any potential trend reversals. However,
by keeping an eye on RSI readings and identifying any divergences, traders can gain valuable insight
into the potential direction of the market.

Failure swings

A failure swing in RSI occurs when the

indicator fails to make a higher high or
lower low despite a corresponding higher
high or lower low in the price of the asset
being analyzed. This divergence can
indicate that the momentum of the trend
is weakening, and a reversal could be
imminent.
There are two types of failure swings in RSI: bullish and bearish. Here’s how they work:

1. Bullish Failure Swing:

A bullish failure swing occurs when the RSI makes a lower high, but the price of the asset makes a
higher high. This indicates that the upward momentum of the trend is weakening, and the price may
be due for a reversal to the downside. Traders may look for confirmation of this signal with additional
technical analysis or by monitoring price action.

2. Bearish Failure Swing:

A bearish failure swing occurs when the RSI makes a higher low, but the price of the asset makes a
lower low. This indicates that the downward momentum of the trend is weakening, and the price
may be due for a reversal to the upside. Traders may look for confirmation of this signal with
additional technical analysis or by monitoring price.

Interpretation of RSI and RSI Ranges

Here’s a breakdown of how to interpret

RSI and RSI ranges in currency trading.

When the RSI is above 70, it indicates

that the currency is overbought, and a
bearish reversal may occur. In other
words, the market is likely to correct
itself, and prices may begin to fall. For
example, let’s say the USD/JPY pair has
an RSI of 80, indicating that the market is
overbought. Traders may take this as a
signal to sell the USD/JPY pair, expecting
a potential decline in price.

On the other hand, when the RSI is below 30, it indicates that the currency is oversold, and a bullish
reversal may occur. In this case, the market is likely to correct itself, and prices may begin to rise. For
instance, let’s say the EUR/USD pair has an RSI of 20, indicating that the market is oversold. Traders
may take this as a signal to buy the EUR/USD pair, anticipating a potential increase in price.

It’s worth noting that the RSI is not always accurate, and it can sometimes give false signals.
Therefore, it’s important to confirm the signal with other technical indicators or fundamental analysis
before taking any trade positions. Traders may also adjust the RSI ranges to suit their trading style
and risk tolerance.

Understanding how to interpret RSI and RSI ranges can be a valuable tool for currency traders. It can
help traders identify potential trading opportunities and manage their risks effectively. However, it’s
crucial to use RSI in combination with other technical and fundamental analysis tools to make
informed trading decisions.

Differences between MACD and RSI Indicator

1. The MACD indicator is derived from the difference between two exponential moving
averages (EMA) of different time periods, while RSI is calculated by comparing the average
gain and average loss of an asset over a certain period.
 2. MACD is more focused on trend identification, while RSI is more focused on momentum.

3. MACD can help traders identify when a trend is strengthening or weakening, while RSI can
help traders identify when momentum is shifting and when a potential reversal may occur.

4. MACD is a lagging indicator based on past price data, while RSI is a leading indicator that can
provide insight into potential market movements before they happen.

Both MACD and RSI can be useful tools for traders, but they have different strengths and
weaknesses. Traders should consider using both indicators in conjunction with other analysis
techniques to gain a more complete understanding of market trends and momentum.

Here are some advantages of RSI:

1. Provides clear signals: RSI is a momentum oscillator that ranges from 0 to 100, and provides
clear signals of trend reversal or continuation. A reading above 70 indicates an overbought
market, while a reading below 30 indicates an oversold market. Traders can use these signals
to make informed trading decisions.

2. Helps identify trend direction: RSI can help traders identify the direction of the trend. If the
RSI is above 50, it indicates a bullish trend, while a reading below 50 indicates a bearish
trend. By identifying the trend direction, traders can make better decisions on whether to
buy or sell.

3. Can be used in different markets: RSI can be used in different markets, including stocks,
currencies, commodities, and indices. This makes it a versatile tool that can be applied to
different trading strategies and styles.
 4. Can be used in combination with other indicators: RSI can be used in combination with
other indicators to provide more accurate trading signals. For example, traders may use RSI
along with moving averages or trend lines to confirm a trend reversal.

5. Helps manage risk: RSI can help traders manage risk by providing them with information
about potential price movements. By identifying oversold or overbought conditions, traders
can set stop-loss orders and limit their losses in case the market moves against them.

Here are some disadvantages of RSI:

1. Over-reliance: RSI indicators may give false signals and can cause traders to over-rely on the
indicator.

2. Lagging indicator: RSI is a lagging indicator, which means that it may not give accurate signals
when the market is rapidly changing.

3. Not suitable for all markets: RSI is best suited for markets that are trending, and not well-
suited for choppy, sideways markets.

4. Can be subjective: Interpretation of RSI indicator signals can vary from trader to trader,
leading to subjective analysis.

5. Limited scope: RSI only measures the strength of a trend and does not provide any indication
of the direction of the trend.

6. Short-term focus: RSI indicators are designed to focus on short-term price movements and
may not be effective for long-term analysis.

7. Can lead to overtrading: Over-reliance on RSI indicators can lead to excessive trading,
resulting in higher transaction costs and reduced profits.

8. Ineffective during high volatility: RSI indicators may not work well during periods of high
volatility when the market experiences sudden price swings.

9. May not account for fundamental factors: RSI indicators only consider price movements and
do not account for fundamental factors that may affect the market.

10. Limited use in isolation: RSI indicators are best used in combination with other technical
indicators to confirm signals, making it less effective when used in isolation.