Relative Strength Index (RSI)

What is Relative Strength Index?

Relative strength index, more commonly known as RSI, is a very popular leading indicator used in technical analysis. The RSI is mainly used for traders to identify momentum and temporarily overbought and oversold market conditions.

What is it?

RSI is a member of the oscillator family. So what that means is that RSI can measure the strength of the market and help us determine the trend, time entries and a whole lot more! The RSI was developed by J. Welles Wilder to measure the speed and change of price movements. It’s not too difficult to tell whether the prices are going towards an uptrend or downtrend. The difficulty lies in whether we know when to enter the trades. If the trend is strong to the upside, how do we know if the price isn’t too expensive for a long position? Likewise, for a downtrend, how do we know if the price isn’t too cheap?

This is when the RSI comes in handy. The RSI can grade the priced movement shown between candles for the last X number of periods (commonly 14), comparing average gains to average losses over the specified period. The RSI will always give you a value between zero and 100. As the price changes, the RSI will register these changes relative to the previous movements to show us the ‘strength’. Higher values on the RSI generally means a Bullish market and lower values, Bearish.

In the above diagram, you will find the ‘Mid-line’ at 50. This is typically used as the cut-off. If the RSI reading is above 50, you can consider the trend to be bullish. If it goes below, you are likely to consider the momentum to be bearish. You can also take a step further and have a line at 70. If the goes beyond 70, the pair is potentially considered as ‘Overbought, while going below 30 would be considered ‘Oversold’.

How is RSI used? How to trade with RSI?

SO how exactly do we use the RSI to help us enter a trade at the ‘right’ price? Let’s look at a case of buying. You start off simply watching the RSI to wait for that precious signal. Since you are looking to buy (aka long position), you may wait for the RSI to read ‘Oversold’, indicating that near-term weakness is signalling a potential to buy in this uptrend. When the RSI is leaving the ‘Oversold’ region below 30, you can execute that buy trade!

The same logic applies for a sell trade, when the RSI comes down and through 70, which implies that the price is leaving the ‘Overbought’ territory, you can look to initiate the short position! This is one of the more common strategies when using RSI.

As you can see, RSI can come in really handy for traders to incorporate into their trading strategies. It gives you a better idea of when to enter a trade and what price is optimal. Of course, there is much more we can do with RSI and the list is certainly not exhaustive but it does give you a sneak preview of what this amazing indicator can do for us. Omada’s verified signal providers use RSI and a whole bunch of other indicators during trading to produce optimal results for our followers! So join us in this trading journey to learn more about trading along the way!