Overbought or oversold?Use the relative strength index to find out

Relative Strength Index (RSI) describes a momentum indicator that measures the magnitude of recent price changes to assess the overbought or oversold conditions of stocks or other asset prices. It was originally developed by the well-known American technical analyst J. Welles Wilder Jr., who introduced this concept in his seminal book “New Concepts of Technical Trading Systems” in 1978.RSI is shown as an oscillator, which is a line chart that moves between two extremes. The reading range is from 0 to 100.

The main trend of a stock or asset is an important tool used to ensure the correct understanding of indicator readings. The well-known market technician Constance Brown has widely promoted the view that RSI oversold readings in an uptrend may be much higher than 30%, while RSI overbought readings in a downtrend are far Less than 70%.

The traditional interpretation and use of RSI indicate that a value of 70 or higher indicates that the security is becoming overbought or overvalued, and may be prepared for a trend reversal or corrective price correction. An RSI reading of 30 or below indicates that it is oversold or undervalued.

READ ALSO:   footprint map

Key points

  • In the financial sector, the Relative Strength Index (RSI) is a momentum indicator that looks at the speed of recent price changes to determine whether a stock is suitable for rising or selling.
  • In addition to other technical indicators, RSI is also used by market statisticians and traders as a means of identifying opportunities to enter or exit positions.
  • Generally speaking, when the RSI exceeds the reference level of level 30, it is a bullish signal, and when it falls below the reference level of level 70, it is a bearish signal.

Overbought and oversold levels

In terms of market analysis and trading signals, when the RSI is above the reference level of 30, it is considered a bullish indicator.

Conversely, RSI below the reference level of 70 is considered a bearish indicator. Since some assets are more volatile and move faster than others, the values ​​of 80 and 20 are also frequently used overbought and oversold levels.

Overbought or oversold?Use RSI to find out

Price/oscillator divergence

Failure volatility

RSI range

During an uptrend, the RSI tends to be more stable than during a downtrend. This makes sense, because RSI measures gains and losses. In an uptrend, there will be more gains, keeping the RSI at a higher level. In a downward trend, RSI will tend to remain at a low level.

In an uptrend, the RSI tends to stay above 30 and should often touch 70. In a downtrend, RSI rarely exceeds 70, and indicators often touch 30 or below. These guidelines can help determine the strength of the trend and detect potential reversals. For example, if the RSI fails to reach 70 during multiple consecutive price fluctuations in an uptrend, but then falls below 30, the trend has weakened and may reverse and go lower.

For the downward trend, the situation is just the opposite. If the downtrend fails to reach 30 or below and then rebounds above 70, the downtrend has weakened and may reverse the upward trend.

RSI trend line break

Momentum indicators: RSI and MACD

Like RSI, Moving Average Convergence Divergence (MACD) is a trend-following momentum indicator that shows the relationship between two moving averages of security prices. MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result of this calculation is the MACD line.

MACD’s 9-day EMA is called the “signal line”, and then drawn on the top of the MACD line, it can be used as a trigger for buying and selling signals. Traders can buy securities when MACD crosses above the signal line, and sell or short securities when MACD crosses below the signal line.


Share your love