What is RSI – Relative Strength Index? RSI is a momentum oscillator indicator which means it tracks the recent psar technical indicator forex of rise or fall in the stock price movement based on the recent close prices. Difference of current close over previous close. The default time frame to measure RSI is 14 periods.
However the same can be lowered or raised to increase or decrease sensitivity. RSI varies between 0 to 100 and the stock is considered overbought when RSI is above 70 or oversold when RSI is below 30. RSI is used to identify oversold and overbought stocks, direction of the trend and thereby trend reversals. Different researchers have come out with various ways to interpret RSI. When RSI crosses 30 from bottom, it indicates bullish confirmation signal and when it crosses 70 from top, it indicates bearish confirmation signal.
RSI fails to confirm price movement signalling reversal and thereby it signals buy. RSI fails to confirm price movement signalling reversal and thereby it signals sell. Bullish Failure Swing – When RSI moves below 30, then bounces back above 30 and then pulls back but holds above 30 and then breaks its prior high, it signals buy. Bearish Failure Swing – When RSI moves above 70, then pulls back below 70 and then bounces back but fails to move above 70 and then breaks its prior low, it signals sell. Note: Divergences are found to only lead to brief reversals and therefore to be used with caution. RSI can give wrong signals in very strong trends.