Relative Strength Index
Relative Strength Index (RSI) is a price-following oscillator that ranges between 0 and 100. When Wilder introduced the Relative Strength Index, he recommended using a 14-day RSI. Since then, the 9-day and 25-day Relative Strength Index indicators have also gained popularity.
How to use Relative Strength Index (RSI) for analysis :
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Tops and bottoms
The Relative Strength Index usually tops above 70 (overbought) and bottoms below 30 (oversold). It usually forms these tops and bottoms before the underlying price chart. When price is overbought, usually it will go down soon. When price is oversold, usually it will go up soon. Sometimes, when RSI above 70 or below 30, it tends to stay in that area for some times. So, it's better to decide after RSI reverse and crossing 30 or 70 level. -
Chart Formations
The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart; -
Failure swing ( Support or Resistance penetrations or breakouts)
This is where the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough); -
Support and Resistance levels
The Relative Strength Index shows, sometimes more clearly than price themselves, levels of support and resistance. -
Divergences
Divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. This divergence is an indication of an impending reversal. Prices usually correct and move in the direction of the RSI.
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