RSI Stock Analysis and RSI Trade Signals
Developed by J. Welles Wilder, explained in the book "New Concepts in Technical Trading Systems".
Relative Strength Index is the most popular indicator & it's a momentum oscillator & a trend following indicator. RSI compares a trading price magnitude of the recent trading price gains against the magnitude of the recent losses price losses & plots this data on a scale of values which ranges between 0-100.
Relative Strength Index measures the momentum of indices; 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 Trade Signals
There are several techniques used to trade, these are:
50-level Crossover Signals
- Buy signal - when the indicator crosses above 50 a buy/bullish signal is given.
- Sell Trading Signal - when the indicator crosses below the 50 a sell/bearish signal is given.
RSI Indices Setup Patterns
Traders can draw trend lines & map out chart setups on the RSI. The Relative Strength Index often forms chart patterns such as head & shoulders pattern which might not have formed clearly on the price chart.
Stock Indices Support/Resistance Breakouts
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 regions.
Swing Failure - Support & Resistance Break out
Overbought/Oversold Conditions on Indicator
- Overbought- levels above 80
- Oversold- levels below 20
These levels can be used to generate 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 aren't suitable for trading because they're prone to a lot of whipsaws.
Divergence Trading 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 website.
