RSI buy and sell signals

Relative Strength Index (RSI)

J. Welles Wilder developed the Relative Strength Index (RSI) in his book "New Concepts in Technical Trading Systems".

The RSI calculates the difference between the closing prices during the observation period. These values are averaged, with a top average of closing prices for periods of higher and lower average for periods with lower closing prices. The relative intensity is the ratio of upper to lower average, and the relative index produced a factor that results in an oscillator zwischen 0 and 100.

With this calculation for RSI Wilder could address two problems he had encountered with other momentum oscillators. First, the RSI should avoid the random movements of other oscillators by smoothing the points. Second, the Y-axis for all instruments to be equal, from 0 to 100 This would allow comparisons between financial instruments and objective assessment of the level of sales over purchases and possible.

The RSI is needed to:

- See over bought and oversold conditions

In the overbought or oversold, the price rose or fell too far, and are therefore likely to normalize.

If the RSI is above 70, the market is considered overbought when the RSI as oversold below 30. 80 and 20 can also serve as thresholds for buying and selling on.

While a market trend signals in the direction of the trend are more reliable. If prices rise, for example, it may be safer to wait that prices fall, enter the oversold signal and increase it again.

RSI buy and sell signals

If the RSI is over 70 and you are looking for a high market value, the return of the RSI is below 70 are used as a sell signal. The same goes for lows, after returning to the RSI is over 30. These signals are best used in markets without a trend.

Trend in markets is the trend towards the most reliable signal. In the example of an uptrend, take only buy signals when the RSI exceeds 30 again after a fall. The reason to accept only signals a trend towards, is that probably in a counter-trend market trend any means a small backward movement, but no repentance.

- To show the divergence of the bull and bear markets

The divergence between the RSI and the price indicates that weakens an upward or downward movement.

Bearish divergence occurs when prices reach higher highs but the RSI reaches lower highs. This is a sign that mitigates the upward movement.

The bullish divergence occurs when prices reach lower lows but the RSI reaches higher lows. This is a sign that mitigates the downward movement.

It is important to note that differences do not show a weakening of the trend, but his repentance. The confirmation or signal that the trend reverses, it must come from price action, for example, if prices break through a trendline.

Parameter

Observation period (default 14)

Lower percentage limit (default 30), gives the lower limit as% of the value of the financial instrument. The number must be less than the upper limit.

Percent upper limit (default 70), gives the upper limit as a% of the value of the financial instrument.

Wilder took 14 as the observation period, although periods of 9 and 7 are common too. A shorter observation period increases the sensitivity of the RSI to price changes and makes it more reactive. A shorter observation period may increase the number of false signals. A longer observation period smooths the RSI and results in fewer signals.

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