Understanding the Relative Strength Index (RSI)
The Relative Strength Index (RSI) is an indicator that evaluates the price momentum of a particular asset.
It utilizes the asset’s price changes and speed to determine oscillations, rated on a scale of 0 to 100.
Relative Strength Index (RSI) | Source: Investopedia
Identifying Overbought and Oversold Conditions
The RSI is vital for identifying whether an asset is overbought or oversold.
An RSI value above 70 indicates overbought conditions, while a value below 30 suggests oversold conditions.
Traders use these signals to determine price trends, divergences, and potential market swings.
Furthermore, the RSI assists traders in identifying potential trend reversals, as well as support and resistance levels.
It enhances the technical analysis process by providing insights into bearish and bullish divergences.
RSI Divergences and Calculation for Trend Analysis
In a bullish divergence, the RSI increases while the asset’s price declines.
This indicates increased buying interest despite the falling price.
In a bearish divergence, the asset’s price rises while the RSI decreases.
This suggests that the upward momentum of the price is weakening.
The RSI is typically calculated based on the price change of an asset over 14 periods, which can be on a daily or hourly chart.
The RSI is obtained by dividing the average gain of the asset within the period by its average loss and plotting the result on a scale of zero to 100.