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Relative Strength Index (RSI): A Guide

Posted by BluFX on 19-Feb-2020 16:12:48

RSI GUIDE

The Relative Strength Index (RSI) is a momentum indicator - and its movement is measured in figures between 0 and 100. The RSI measures recent price changes to evaluate overbought or oversold conditions in the price of a stock.

You can read all about the RSI here - what it is, how you can use its values during trading and other tips - here.

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Relative Strength Index (RSI): A Guide

How do you use RSI values while trading?

So - what do RSI values mean and how can you use these while making trading decisions?

  • Values of 70 or above suggest that an asset is being overbought or overvalued and indicate that there may be a trend reversal where the price weakens.
  • Values of 30 or below suggest an oversold or undervalued condition and indicate that the price may strengthen.
  • Values of 50 are in between these.

Some traders see assets of 30 or below as an opportunity to buy, while values of 70 or above generally indicate an opportunity to sell.

The key to successful trading is an effective trading plan. Read our tips on The 8-Step Ultimate Trading Plan Checklist

RSI is usually used to confirm price action patterns and to trigger buy or sell signals. You can see examples of oversold and overbought below - image from Fidelity.com.

Image from Fidelity

How are RSI centre lines used when making trading decisions?

In addition to using its values to indicate overbought and oversold assets, the RSI is also used to evaluate trends using centre line crossovers:

  • A movement from below the centre line (50) to above indicates a rising trend
  • A movement from above the centre line (50) to below indicates a falling trend

When the RSI value crosses ABOVE the 50 line on the scale, this indicates the market trend is increasing in strength and is seen as a bullish signal until the RSI approaches the 30 line.

When the RSI value falls BELOW the 50 line on the scale, this indicates the market trend is weakening in strength and is seen as a bearish signal until the RSI approaches the 30 line.

You can see an example of a bullish and bearish divergence below - chart from stockcharts.com.

BearishBullish

Looking for more trading tips? Read 3 Things Every Trader Should Do Each Week

 

Tags: Trading Tips

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