Updated Mar 24, 2022

What is the Relative strength index (RSi)?

What is the Relative strength index (RSi)

Introduction

The relative strength index refers to momentum indicators applied in technical analysis. It is used to measure the recent price changes' magnitude to make it possible to evaluate oversold or overbought conditions in a stock's or asset's price. The relative strength index is shown as an oscillator and could read from zero to about a hundred.

The former meaning of the term is that anything above 70 RSI points becomes overvalued or overbought and can be positioned for a corrective pullback or trend reversal in price. And, anything below 30 RSI points becomes undervalued or oversold.

The formula of Relative Strength Index

The general formula used for calculating RSI = 100 – [100/ (1+ (Average of Upward Price change or average of downward price change))]

Features of Relative Strength Index

Some specific features of the Relative Strength Index are:

Trend Line

The Relative Strength Index is almost similar to a closing chart, and it isn't easy to see differences between them. The application of trend lines in the closing chart, regardless of the closing chart being up or down, can also be copied as the application of trend lines in the Relative Strength Index. The Relative Strength Index trend lines might get broken three to four days prior. Further, it would give an advance insight about the price breaking the same trend line in one day or two.

Pattern

A relative strength index is found to be considering the underlying relative strength of a stock during a particular period. Breakouts like this might occur at least two to three days prior in the Relative Strength Index in due course, which the price would follow.

Breakout and Breakdown

Advance breakout is the Relative Strength Index indicator that has been able to break the preceding top when the price has not broken the preceding top yet. It is a form of early signal responsible for indicating that price would go on the same path as the Relative Strength Index indicator in further sessions.

50's Role

The mid fifty line is important as it indicates the direction of the price. During the bullish phase the price stays above the mid fifty line. On the other hand, the price faces resistance from the mid fifty line in the Relative Strength Index at the time of the market’s bearish phase.

Swing

A bullish failure swing is formed when the Relative Strength Index moves to less than 30 points. This then goes up to more than 30 and pulls back and stays at that position. And this further leads to the breaking of the already reached high point. There is a move in the direction of oversold levels and then finally there is a move towards the levels above oversold levels.

RSI Divergences

There is a bullish divergence when the Relative Strength Index creates an oversold reading, followed by a higher low, which corresponds with the lower lows in the price. This indicates rising bullish momentum, and when there is a break above the oversold territory, it is to be applied to trigger a long position.

There is a bearish divergence when the Relative strength index creates an overbought reading, followed by a lower high, which corresponds with the higher highs in the price. The divergences could be very uncommon if the stock is not in a very stable long term trend. The use of flexible overbought or oversold readings may assist in identifying more potential signals.

Limitations of Relative Index Strength

One can find the Relative Index Strength indicator's signal to be most trustworthy only when the signals conform to the long term trend. The Relative Index Strength indicator is found to be displaying momentum. This could remain oversold or overbought for some time when an asset has important momentum in any direction.

Conclusion

The signal of the quality of the relative Strength Index Indicator depends on the feature of the underlying security. The Relative Strength Index needs to be applied in a manner that is in conjunction with other indicators and technical parameters to have a more confirmed and better trading signal overall. The above-mentioned pointers and information are the basics of the Relative Strength Index to provide general awareness about the concept.