Relative Strength Index

February 10, 2024
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Graph showing upward trajectory

In this article we will look at the Relative Strength Index or RSI for short.The RSI is an indicator that can be used in technical analysis to show the strength of weakness of an asset’s momentum.This is calculated based on an assets price movement of a period of time with the standard settings being a 14 candle period be it on any timeframe, This can be changed on your trading style if you want the indicator to move quicker or slower.The indicator its self oscillates between between 0 to 100 and if the RSI line drops below 30 it would suggest that the asset in over sold and to expect the price to start moving up or above 70 it would suggest that the asset is over bought and you can expect the price to start coming down.The RSI can also be used for confirmation of a trend, if in a bullish trend and the RSI stays above the 50 line after a pullback in price this could be seen as a continuation of the bullish trend. Likewise if the price is in a bearing trend and the RSI stays below the 50 line this could be seen as a bearish continuation.Traders tend to use the RSI to help them identify possible buy and sell signals, If the RSI crosses above the 70 level in could make traders want to think about taking some profits in long positions and maybe looking to start shorting the asset, Likewise when the RSI crosses the the 30 level traders could be looking to start taking profits in their short positions and start looking to build longs.

Like any indicator the RSI shouldn’t be used alone and most traders would use the RSI alongside Divergence where the price action is doing the opposite of the RSI indicator.Now lets looks at the advantages and disadvantages of using the RSI. 4 PROSThe RSI is easy to use indicator and can be used by any experience of trader be it old or new.Can be used along side other indicators to help traders confirm trend and bias.Works on multiple timeframes, so ideal for swing traders, Day trader and long-term holders.Can be used to Identify trend reversals 4 CONSLike all indicators the RSI is not alway accurate and can lead to false signalsThe RSI in a lagging indicator, Therefore sometimes lags behind price action.It can be subjective as different traders will have different views on what’s overbought and oversoldDoesn’t work will in a sideways market when price is consolidating.Should I use the RSI in my technical analysis?The answer to this is like any other indicator, If you understand how the RSI works and are using it alongside other technical analysis like Divergences personally I would say the RSI is a great tool to have in you trading arsenal.

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