RSI Stock Indices Analysis and RSI Indices 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 and it is a momentum oscillator and a trend following indicator. RSI compares a trading price magnitude of the recent trading price gains against its magnitude of recent losses trading 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 Indices Analysis and 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 trading signal is given.
• Sell Trading Signal - when the indicator crosses below the 50 a sell/bearish trading signal is given.

RSI Indices Setup Patterns

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

Stock Indices Support/Resistance Breakouts

RSI is a leading indicator and can be used to predict Support/Resistance Breakouts before trading 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 and Resistance Break out

Overbought/Oversold Conditions on Indicator

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

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

Divergence Trading Setups

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