Relative Strength Index

The RSI is a momentum indicator, designed to measure both the velocity and magnitude of price by oscillating on a scale between 0 and 100.

Developed by Wells Wilder as a technical analysis indicator, RSI was featured in his book “New Concepts in Technical Trading Systems” in 1978.

Upon release, a number of industry experts and magazines praised Wilder and his indicator, claiming it to be one of the best technical indicators ever developed.

Presently, traders still consider the RSI to be extremely powerful, using it to determine both trends and reversals.

The default setting for the RSI is a period of 14.

The RSI is most commonly used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively.

How to Trade With RSI

Additionally, shorter or longer time frames are used for alternately shorter or longer outlooks.

More extreme high and low levels, 80 and 20, or 90 and 10 occur less frequently but indicate stronger momentum.

Generally speaking, RSI is considered overbought when above 70 and oversold when below 30.

These traditional levels can also be adjusted when necessary to better fit the specific asset being traded.

For example, during an uptrend or bull market, the RSI will often remain in the 40 to 90 range with the 40-50 zone acting as support.

By extension, during a downtrend or bear market the RSI tends to stay between the 10 to 60 range with the 50-60 zone acting as resistance.

These ranges are dependent on the RSI settings and the strength of the security’s or market’s underlying trend.

If underlying prices make a new high or low that isn't confirmed by the RSI, this divergence can signal a price reversal.

However, if the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred.

If the RSI makes a higher low and then follows with an upside move above a previous high, a Bottom Swing Failure has occurred.