Understanding the Relative Strength Index (RSI) (2024)

What is RSI?

The Relative Strength Index (RSI) is a highly practical technical analysis tool used to indicate whether a stock or other asset is overbought or oversold. The RSI measures the ratio of cumulative gains to losses over a period, assessing the relative strength or weakness of price movements. The RSI value oscillates between 0 and 100; RSI1, RSI2, and RSI3 correspond to the 6-day, 12-day, and 24-day RSI, respectively.

How is it calculated?

There are various ways to calculate the RSI, and one common method is as follows:

Here, RS = Average gain of n up days / Average loss of n down days.

How to use the RSI

Key points for using the RSI indicator include:

• Buy/Sell SignalsAn overbought RSI (>70) suggests a potential sell signal when it crosses back below the 70 thresholds;An oversold RSI (<30) indicates a potential buy signal when it crosses back above the 30 thresholds.

• Support and ResistanceIn an uptrend, the RSI tends to stay above 40, with the 40-50 range acting as potential support;In a downtrend, the RSI generally stays below 60, with the 50-60 range serving as potential resistance.

• Divergence SignalsDivergence occurs when the price makes new highs or lows, but the RSI does not follow suit, indicating a possible reversal in price trends.Bullish divergence arises when the price hits a lower low while RSI forms a higher low, suggesting strengthening momentum if the RSI has not confirmed a lower low;Bearish divergence happens when the price reaches a higher high while RSI forms a lower high, signaling weakening momentum if RSI doesn't confirm a new high.

1. RSI falls below 30 (oversold);

2. RSI rebounds above 30;

3. RSI pulls back but stays above 30;

4. RSI breaks above its prior high.

Bearish failure swing:

1. RSI rises above 70 (overbought);

2. RSI falls back below 70;

3. RSI bounces but remains below 70;

4. RSI breaks below its prior low.

Note: The RSI should be used in conjunction with other indicators for a more comprehensive approach to trading decisions.