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Trading

What’s an RSI indicator?

Relative Strength Index Indidicator

Technical analysis (TA), is basically the study of past market events in order to predict future price movements and trends. RSI is one such tool. Most traders use specialized tools to analyze markets from traditional to cryptocurrency.

Relative Strength Index (RSI), a TA indicator, was created in the late 1970s to help traders analyze how stocks perform over a time period. It is actually an impulse oscillator which measures both the magnitude and speed of price movements. Depending on the trading profile and settings, RSI could be a useful tool.

J. Wilder created the Relative Strength Index. J. Wilder created the Relative Strength Index in 1978. It was included in his book New Concepts of Technical Trading Systems along with other TA indicators like parabolic SAR and Average True Range (ATR) and Mid-Range Index(ADX).

Wilder was a developer and mechanical engineer before becoming a technical analyst. Wilder began trading stocks in 1972 but failed to achieve great success. Wilder collected his trading experience and research into mathematical formulas that were later used by many traders all over the globe. It was published in six months and is still an invaluable reference for traders and charters.

What is the RSI indicator?

The RSI measures price changes over 14 periods. It can be used to measure 14 days of daily charts or 14 hours of hourly charts. The formula divides the average price increase over this period by the average loss, then displays the data on an scale of 0 to 100.

An RSI, or momentum indicator, is a technical trading tool that measures the rate at which a price (or other data) changes. If momentum is increasing and the price rises it means that stocks are being actively bought. If momentum falls, it means that sellers are increasing pressure.

The RSI can also be used as an oscillating indicator to help traders determine market conditions that are overbought and oversold. The RSI evaluates an asset’s price on a scale of 0 to 100, taking into consideration 14 periods. An asset with a RSI below 30 indicates it is close to its bottom (oversold), but a measurement of 70 or more means that the asset’s price is likely to be close to its highest (overbought).

The default RSI setting is 14 periods. However, traders have the ability to change the settings to increase or decrease the sensitivity. The 7-day RSI has a higher sensitivity to price movements than the 21-day RSI. Short-term trading setups, such as those that view 20 and 80 (instead 30 and 70) as oversold or overbought levels can also adjust the RSI indicator so there is less chance of false signals.

How to use RSI Based On Discrepancies

Apart from rsi numbers of 30 and 70 which may indicate oversold market conditions, traders can also use the RSI in order to forecast a trend reversal and identify support and resistance levels. This is based upon the so-called bearish and bullish divergences.

Bullish divergence refers to a situation in which the price or the RSI indicator move in opposite directions. The RSI indicator increases and creates higher lows while the price falls creating lower lows. This is known as bullish divergence. It indicates that the purchasing power is increasing despite the downtrend.

Contrarily, bearish divergences could indicate that the market is losing momentum despite its price rise. The RSI drops and creates lower highs while the asset’s price rises and creates greater highs.

Keep in mind, however, that RSI divergences can be less reliable when there are strong market trends. A strong downtrend could lead to many bullish divergences until the bottom is reached. RSI divergences work better in less volatile markets with subtle or sideways movements.

Last Thoughts

There are many important factors to be aware of when using the Relative Strength Index. These include settings, score (30 and 70%), and bullish/bearish diversgence. It is important to remember that no technical indicator is perfect, particularly if used in isolation. To avoid false signals, traders should use the RSI indicator in conjunction with other indicators.

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