What is the relative strength index? - Guide Part 40
The RSI is an oscillator type indicator that reflects the relative strength of bullish movements, compared to bearish movements. It is used by traders to measure the strength of a trend and detect end-of-trend signals.
The RSI indicator provides valuable market information and trading signals. Measures the interaction between up and down movements, and normalizes the calculation so that the index fluctuates in a range from 0 to 100.
RSI Formula
Contrary to many opinions, the RSI indicator is a leading indicator among stock market indicators.
The RSI formula has 2 equations present that are involved in solving the formula. The equation of the first element receives the initial relative strength cost (RS), which is the average of the bullish closes above the average of the bearish closes, during a period "N" represented in the following calculation:
RS = Exponential moving average of 'N' bullish periods / Exponential moving average of 'N' bearish periods (in absolute cost).
The cost of the RSI indicator is calculated by indexing the indicator to 100 using the following formula:
RSI = 100 - (100/1 + RS).
Interpret RSI - How the RSI indicator works
The RSI indicator is valid for any asset and any time horizon. As we have already said, it suggests the relative strength left to the asset in question.
It comprises 2 static lines, at 30 and 70 (although a line can be increased by 50 to give extra information) and a moving average (RSI average). This average is what serves as a point of reference.
The RSI indicator window could be as follows:
How to interpret the RSI?
• RSI indicator around degree 30: reflects oversold levels, as well as suggests that costs have accumulated relative strength. In this situation, we are talking about a situation in which costs have fallen sharply and now displacement could lose steam.
• RSI indicator around degree 70: reflects overbought levels, as well as also suggests that costs do not have accumulated relative strength. This is a situation where costs have risen sharply and displacement is likely to weaken.
• The RSI indicator oscillates horizontally around the 50 degree: it assumes that the market is lacking a trend. The 50 degree is the middle line that separates the bullish and bearish countries of the indicator.
It should be noted that in other terms it is configured by default.
The closer the degree is to the 100 area, the fewer trading signals will be identified by the RSI indicator. The closer you are to the 50 degree, the more signals you will have (including false signals).
Therefore, this trading indicator gives data about the direction of the market trend, but also (and above all) about its strength. This will help the stock market investor to decide whether he wants to continue the trend or, on the other hand, to monitor a change in trend to change direction.
It should be considered that once costs are overbought and / or oversold, it is once aggressive scenarios are commonly seen in the same direction, that is, if we see overbought in cost, it is feasible that we see an aggressive upward scenario. and, on the other hand, if costs remain oversold, costs have the possibility of interpreting an aggressive downward scenario.
RSI Technical Study - Interaction of RSI with Trend Lines
The design of the RSI trend lines uses the same methodological concepts as in the cost curves. You simply have to connect the vertices of the RSI indicator and trade the separation on the trend line.
• To draw an uptrend line on the indicator, you must connect 2 or 3 or more vertices of the RSI indicator while increasingly higher views appear.
• However, a descending line is drawn connecting 3 or more peaks as the viewpoints descend.
The separation of a trend line from the RSI could indicate a viable continuation or reversal of costs.
Make sure that the dissolution of a trend line in the indicator frequently precedes the dissolution of a trend line in the main chart of your asset, thus providing an advance warning and a possibility to anticipate the movement and establish the trend.
• RSI example: technical study with trend lines
Is the RSI 14 the best option?
Several scalping traders will trade RSI 14. But what does RSI 14 mean? Simply that you select 14 periods in the indicator settings once you add it to your Tradingview chart. Therefore, you can choose the number of periods yourself in the RSI calculation.
The shorter the number of periods, the faster the RSI will follow the current market trend.
• For a 9 RSI on a 1 minute chart: the RSI indicator corresponds to the average of the last 9 min.
• For a 14 RSI on a 5 min chart: the RSI indicator is the average of the last 70 min.
• For a 25 RSI on a 1 day chart: the RSI is the average of the last 25 days.
Advantages and disadvantages of the RSI indicator
The main advantages of the RSI indicator are:
• This indicator makes it possible to see at a glance if the market is in overbought or oversold zones
• It is simple to interpret
• It enables you to easily decide a trend in the stock market
• It is a very effective technical indicator in short-term trading, especially for scalping.
• Experienced traders mainly find that their performance is greatly enhanced by the conjunction of the RSI indicator tactic and pivot points.
• This indicator is constantly also combined with other technical study tools, such as MACD or stochastic.
The disadvantages:
• The RSI in the stock market is not a miracle solution to continually succeed in the stock market
• Like any other technical indicator, it can also offer wrong trading signals.
• Less accurate when used in markets with low volatility
• In a market with a deep trend, the RSI can remain in the same overbought or oversold area for a long time.
• For all the markets in which you want to invest, you need to detect the appropriate RSI setting.
The RSI indicator provides valuable market information and trading signals. Measures the interaction between up and down movements, and normalizes the calculation so that the index fluctuates in a range from 0 to 100.
RSI Formula
Contrary to many opinions, the RSI indicator is a leading indicator among stock market indicators.
The RSI formula has 2 equations present that are involved in solving the formula. The equation of the first element receives the initial relative strength cost (RS), which is the average of the bullish closes above the average of the bearish closes, during a period "N" represented in the following calculation:
RS = Exponential moving average of 'N' bullish periods / Exponential moving average of 'N' bearish periods (in absolute cost).
The cost of the RSI indicator is calculated by indexing the indicator to 100 using the following formula:
RSI = 100 - (100/1 + RS).
Interpret RSI - How the RSI indicator works
The RSI indicator is valid for any asset and any time horizon. As we have already said, it suggests the relative strength left to the asset in question.
It comprises 2 static lines, at 30 and 70 (although a line can be increased by 50 to give extra information) and a moving average (RSI average). This average is what serves as a point of reference.
The RSI indicator window could be as follows:
How to interpret the RSI?
• RSI indicator around degree 30: reflects oversold levels, as well as suggests that costs have accumulated relative strength. In this situation, we are talking about a situation in which costs have fallen sharply and now displacement could lose steam.
• RSI indicator around degree 70: reflects overbought levels, as well as also suggests that costs do not have accumulated relative strength. This is a situation where costs have risen sharply and displacement is likely to weaken.
• The RSI indicator oscillates horizontally around the 50 degree: it assumes that the market is lacking a trend. The 50 degree is the middle line that separates the bullish and bearish countries of the indicator.
It should be noted that in other terms it is configured by default.
The closer the degree is to the 100 area, the fewer trading signals will be identified by the RSI indicator. The closer you are to the 50 degree, the more signals you will have (including false signals).
Therefore, this trading indicator gives data about the direction of the market trend, but also (and above all) about its strength. This will help the stock market investor to decide whether he wants to continue the trend or, on the other hand, to monitor a change in trend to change direction.
It should be considered that once costs are overbought and / or oversold, it is once aggressive scenarios are commonly seen in the same direction, that is, if we see overbought in cost, it is feasible that we see an aggressive upward scenario. and, on the other hand, if costs remain oversold, costs have the possibility of interpreting an aggressive downward scenario.
RSI Technical Study - Interaction of RSI with Trend Lines
The design of the RSI trend lines uses the same methodological concepts as in the cost curves. You simply have to connect the vertices of the RSI indicator and trade the separation on the trend line.
• To draw an uptrend line on the indicator, you must connect 2 or 3 or more vertices of the RSI indicator while increasingly higher views appear.
• However, a descending line is drawn connecting 3 or more peaks as the viewpoints descend.
The separation of a trend line from the RSI could indicate a viable continuation or reversal of costs.
Make sure that the dissolution of a trend line in the indicator frequently precedes the dissolution of a trend line in the main chart of your asset, thus providing an advance warning and a possibility to anticipate the movement and establish the trend.
• RSI example: technical study with trend lines
Is the RSI 14 the best option?
Several scalping traders will trade RSI 14. But what does RSI 14 mean? Simply that you select 14 periods in the indicator settings once you add it to your Tradingview chart. Therefore, you can choose the number of periods yourself in the RSI calculation.
The shorter the number of periods, the faster the RSI will follow the current market trend.
• For a 9 RSI on a 1 minute chart: the RSI indicator corresponds to the average of the last 9 min.
• For a 14 RSI on a 5 min chart: the RSI indicator is the average of the last 70 min.
• For a 25 RSI on a 1 day chart: the RSI is the average of the last 25 days.
Advantages and disadvantages of the RSI indicator
The main advantages of the RSI indicator are:
• This indicator makes it possible to see at a glance if the market is in overbought or oversold zones
• It is simple to interpret
• It enables you to easily decide a trend in the stock market
• It is a very effective technical indicator in short-term trading, especially for scalping.
• Experienced traders mainly find that their performance is greatly enhanced by the conjunction of the RSI indicator tactic and pivot points.
• This indicator is constantly also combined with other technical study tools, such as MACD or stochastic.
The disadvantages:
• The RSI in the stock market is not a miracle solution to continually succeed in the stock market
• Like any other technical indicator, it can also offer wrong trading signals.
• Less accurate when used in markets with low volatility
• In a market with a deep trend, the RSI can remain in the same overbought or oversold area for a long time.
• For all the markets in which you want to invest, you need to detect the appropriate RSI setting.
Disclaimer
The information and publications are not meant to be, and do not constitute, financial, investment, trading, or other types of advice or recommendations supplied or endorsed by TradingView. Read more in the Terms of Use.