What is the RSI indicator?
To make trading more convenient and efficient, many investors use technical indicators. As a rule, indicators are designed for certain purposes. The RSI indicator is one of the most popular technical tools.
The relative strength index (RSI) is a momentum oscillator created by J. Welles Wilder.
This indicator is widely used in technical analysis as it is easy to calculate and plot on charts. In addition, it is not affected by the past performance of an asset.
The RSI measures the speed and magnitude of price changes, helping traders to evaluate overvalued or undervalued conditions.
It usually fluctuates in the range from 0 to 100. Traditionally, a reading of 70 or above signals an overbought situation. A reading of 30 or below indicates an oversold condition.
However, traders can apply this indicator according to their own strategy. For example, if you are trading shares that consistently reach 70, it would be wise to shift the upper border to 80.
When the trend is strong, the indicator may be in the oversold or overbought areas longer than usual.
Here are the main advantages of the RSI:
- It is easier to calculate than other indicators;
- It is not affected by previous data;
- When plotting the RSI, one can add several entry points;
- It can be applied to determine the overall trend.
However, there are also certain peculiarities that you should keep in mind when using the RSI: ⁃ The indicator may set trend lines or peaks that are not always displayed on the price chart; ⁃ The 40-90 level usually indicates a bull market. In this case, the support area is seen between 40-50; ⁃ When the trend is bearish, it settles at the level from 10 to 60. The resistance area is located at 50-60. These figures may be different with specific RSI settings or a strong trend.
