What Is the Relative Strength Index? Definition, Calculation & Example

The second compares the price performance of two or more securities. In theory, the crossover strategy could prevent a trader from purchasing when the market is diving and selling on a sharp rally. Traders would want to avoid a situation where they are buying when the what is relative strength index RSI hits 30, just to see the RSI then tumble to 10. The chart above shows the price of Apple shares along with the RSI in the upper panel for the six months ending 5 March 2018. Apple’s share price was overbought once in early November 2017, according to the RSI.

During a downtrending movement, when the market is bearish, the RSI ranges from 10 to 60, with the zone acting as a resistance line. The asset in an uptrend may stand within the overbought zone for an extended period of time. At the same time, the asset in a downtrend may stay within the oversold zone. The RSI was designed to help traders identify potential reactions or reversals from overbought and oversold levels. Although it’s a popular and widely used tool, you should be aware of its limitations.

RSI trading strategies

Placing RSI directly on top of the price plot accentuates the movements relative to price action of the underlying security. Users can apply “advanced options” to smooth the indicator with a moving average or add a horizontal line to mark overbought or oversold levels. Before getting too excited about divergences as great trading signals, it must be noted that divergences are misleading in a strong trend. A strong uptrend can show numerous bearish divergences before a top actually materializes. Conversely, bullish divergences can appear in a strong downtrend – and yet the downtrend continues. Chart 6 shows the S&P 500 ETF with three bearish divergences and a continuing uptrend. These bearish divergences may have warned of a short-term pullback, but there was clearly no major trend reversal.

Divergence between price and RSI is considered a strong indicator of an imminent price reversal. Asset prices above 70 are usually considered overbought, while prices under 30 are considered oversold. Karl Montevirgen is a professional writer who specializes in the fields of finance, cryptomarkets, content strategy, and the arts. He’s also a veteran financial market professional with FINRA Series 3 and Series 34 licenses. Using the RSI in this particular way is very similar to drawing trend lines on a price chart. A rising centerline crossover occurs when the RSI value crosses ABOVE the 50 line on the scale, moving towards the 70 line.

RSI calculator

Popular instruments and commodities to track via relative strength index include bitcoin, gold, and silver. The Relative Strength Index, or RSI, is a technical indicator measuring the strength and momentum behind a stock’s recent price moves. It can https://www.bigshotrading.info/ give you a sense of when a stock might have become over- or undervalued—and possibly ripe for a reversal. RSI measures how much a stock has gained on its up days relative to how much it’s lost on its down days, over a default of 14 trading periods.

Determine significant support and resistance levels with the help of pivot points. This relative strength index divergence shows a price reversal due to a new increase or decrease in prices that the RSI does not corroborate. A Top Swing Failure results from a lower high below the prior low established by the RSI. Conversely, a Bottom Swing Failure results from a higher low above a previous high established by the RSI. If underlying prices make a new high or low that isn’t confirmed by the RSI, this divergence can signal a price reversal.

What is the RSI formula?

You can learn more about the standards we follow in producing accurate, unbiased content in oureditorial policy. Traders can use RSI to predict the price behavior of a security. The RSI is displayed as an oscillator on a scale of zero to 100. Welles Wilder Jr. and introduced in his seminal 1978 book, New Concepts in Technical Trading Systems.