Relative Strength Index Analysis & RSI Trading Signals

Created by J. Welles Wilder, described in the book "New Concepts in Technical Systems".

RSI is the most popular indicator & it is a momentum oscillator and a trend following indicator. RSI compares a price magnitude of the recent price gains against its magnitude of recent losses price losses & plots this data on a scale of values which ranges between 0-100.

RSI measures the momentum of stock; values above 50 signify bullish momentum while values below 50 center-line signify bearish momentum.

• RSI is drawn as a green line
• Horizontal dashed lines are plotted to spotting overbought & oversold levels are i.e. 70/30 levels respectively.

Trading Analysis & Generating Trading Signals

There are several techniques used to trade, these are:

50-level Crossover Signals

• Buy signal - when the indicator crosses above 50 a buy/bullish signal is given.
• Sell Signal - when the indicator crosses below the 50 a sell/bearish signal is given.

RSI Setups

Traders can draw trend lines & map out chart patterns on the RSI indicator. The RSI often forms patterns such as head and shoulders pattern which might not have formed clearly on the price chart.

Stocks Support/Resistance Break outs

RSI is a leading indicator & can be used to predict Support/Resistance Breakouts before stocks price breaks its support/resistance level. RSI uses the swing failure signal to predict when price is about to break support and resistance areas.

Swing Failure - Support & Resistance Breakout

Overbought/Oversold Conditions on Indicator

• Overbought- levels above 80
• Oversold- levels below 20

These levels can be used to generate signals such as when RSI turns up from below 20 after oversold, buy & sell when RSI crosses to below 80 after overbought, sell. These signals are not suitable for because they are prone to a lot of whipsaws.

Divergence Setups

Divergence trading is one of the analysis method used to trade reversals of the stocks price trends. There are four types of divergences that can be traded with this indicator covered in the divergence tutorial on this website.