RSI is a momentum oscillator developed by J. Welles Wilder, measuring the speed and magnitude of price changes by comparing upward and downward price movements over a period. RSI ranges from 0-100, used to identify overbought/oversold conditions and potential trend reversals.
RSI = 100 - [100 / (1 + RS)] Where: RS = Average Gain / Average Loss Average Gain = Sum of gains over N periods / N Average Loss = Sum of losses over N periods / N Standard period: N = 14
Standard RSI (14 periods): Most commonly used, balances sensitivity and reliability
Fast RSI (7-9 periods): More sensitive, suitable for short-term trading, but more false signals
Slow RSI (21-25 periods): Smoother, reduces false signals, suitable for long-term analysis
RSI Divergence: Price and RSI move in opposite directions, signals trend reversal
RSI Patterns: Head and shoulders, double tops on RSI chart are equally valid
Overbought Signal: RSI > 70 indicates overbought, possible pullback or reversal
Oversold Signal: RSI < 30 indicates oversold, possible bounce or reversal
Centerline Cross: RSI crossing above 50 indicates strengthening bullish momentum, below 50 indicates strengthening bearish momentum
Bearish Divergence: Price makes new high but RSI doesn't, signals weakening upward momentum, possible decline
Bullish Divergence: Price makes new low but RSI doesn't, signals weakening downward momentum, possible rise
Failure Swing: RSI fails to break previous high or low, signals trend reversal
In strong trends, RSI may remain in overbought or oversold territory for extended periods; counter-trend trading should be avoided. More reliable strategy is waiting for RSI to return from overbought/oversold zones before entering. RSI divergence is one of the most powerful signals, especially when occurring near key support/resistance levels. Many traders combine RSI with trend indicators (like MA) to find RSI signals in trend direction.
Identifies overbought/oversold conditions, strong divergence prediction capability, applicable to various markets and timeframes, relatively simple calculation, provides clear numerical reference
May remain overbought/oversold for extended periods in strong trends, prone to false signals when used alone, overbought/oversold thresholds may vary across markets and instruments, lag may cause missing optimal entry points
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