RSI Analysis and RSI Signals

Developed by J. Welles Wilder, explained in the book "New Concepts in Technical Systems".

Relative Strength Index is the most popular indicator & it is a momentum oscillator and a trend following indicator. RSI compares a price magnitude of the recent price gains against its magnitude of recent losses price losses and plots this data on a scale of values which ranges between 0-100.

Relative Strength Index measures the momentum of a instrument: values above 50 signify bullish momentum while values below 50 center-line signify bearish momentum.

• RSI is drawn as a green line
• Horizontal dashed lines are plotted to identifying overbought & oversold levels are i.e. 70/30 levels respectively.

Stock Analysis & Generating Signals

There are several techniques used to trade, these are:

50-level Crossover Signals

• Buy signal - when the indicator crosses above the 50 a buy/bullish signal is given.
• Sell Signal - when the indicator crosses below 50 a sell/bearish signal is given.

RSI Patterns

Traders can draw trend lines & map out chart patterns on the RSI indicator. The Relative Strength Index often forms patterns such as head & shoulders pattern which might not have formed clearly on the price chart.

Stock Support/Resistance Break outs

RSI is a leading indicator & can be used to predict Support/Resistance Breakouts before price breaks its support/resistance level. RSI uses the swing failure signal to predict when price is about to break resistance and support zones.

Swing Failure - Support and Resistance Breakout

Overbought/Oversold Conditions on Indicator

• Overbought- levels above 80
• Oversold- levels below 20

These levels can be used to generate stock signals such as when RSI turns up from below 20 after oversold, buy & sell when RSI crosses to below 80 after overbought, sell. These signals are not suitable for because they are prone to a lot of fakeouts.

Divergence Stock Setups

Divergence trading is one of the technical analysis method used to trade reversals of the price trends. There are four types of divergences that can be traded with this indicator covered in the divergence tutorial on this web site.