Relative Strength Index RSI Definition, Guide, How It Works

relative strength index definition

By emphasizing price action, the concept of positive and negative reversals challenges our thinking toward momentum oscillators. Welles Wilder, measures the speed and change of price movements. When the RSI is above 70, it generally indicates overbought conditions; when the RSI is below 30, it indicates oversold conditions. The RSI also generates trading signals via divergences, failure swings, and centerline crossovers.

These guidelines can help traders determine trend strength and spot potential reversals. For example, if the RSI can’t reach 70 on several consecutive price swings during an uptrend but then drops below 30, the trend has weakened and could be reversing lower. Unlike RSI divergences and positive-negative reversals, swing rejections or failure swings are independent of price action, focusing solely on RSI for signals. The RSI is not as reliable in trending markets as in trading ranges. In fact, most traders accept that the signals given by the RSI in strong upward or downward trends often can be false.

RSI Divergence

Welles Wilder Jr. suggested collecting data from the past 14 trading periods, or days. RSI is a versatile momentum oscillator that has stood the test of time. Despite changes in volatility and the markets, RSI remains as relevant now as it was in Wilder’s days. While Wilder’s original interpretations are useful for understanding the indicator, relative strength index definition the work of Brown and Cardwell takes RSI interpretation to a new level. RSI is a popular momentum indicator that has been featured in a number of articles, interviews, and books over the years. In particular, Constance Brown’s book, Technical Analysis for the Trading Professional, features the concept of bull and bear market ranges for RSI.

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When the highs and lows of the RSI move in the same direction with the highs and lows of the trend, then we have convergence, which means the trend is strong and accelerating. When the highs and lows of the RSI and the price move in opposite directions, then the trend is considered to be weaker and slowing down. But to understand the ideas in full, we should, first of all, focus on the terms convergence and divergence. Both terms define a directional relationship between two indicators, trends, prices, etc. Convergence describes the process when they are coming together, while divergence, on the opposite, defines a situation where they are moving apart. Also, you must always look at a broader time frame instead of focusing on a short-term period.

Finding and Using RSI on

Chart 4 shows MEMC Electronics (WFR) trading between 13.5 and 21 from April to September 2009. The stock peaked soon after RSI reached 70 and bottomed soon after the stock reached 30. The chart below shows an example of divergence between price and the Relative Strength Index. However, the RSI (plotted in the lower chart window) does not follow suit and make a corresponding new low. Instead, it has already begun to turn to the upside near the beginning of June.

They are momentum indicators that can be used with other indicators to pinpoint corrections and price breakouts. This tool then fashions a trend indicator, which rises and falls within these extreme values. The term overbought refers to an instance when an asset’s trading value is above its fair or intrinsic value. An overbought asset tends to be indicative of recent or short-term price movements. As such, there’s an expectation that the market will see a correction in the price in the near term. Bullish and bearish markets play a big role in how the RSI behaves.

Multi-Timeframe Analysis with RSI

Welles Wilder Jr. is that he had no prior financial experience. He is an American mechanical engineer who later switched focus to real estate. This didn’t stop him from turning to technical analysis and becoming one of the most prominent figures in the field. Moreover, the RSI is relatively easy to calculate and interpret, making it accessible to both novice and experienced traders.

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