The relative strength index (RSI) is a technical momentum indicator that compares recent price gains against recent price losses. It is primarily employed by traders and analysts to indicate possible overbought or oversold conditions in a market. However, overbought and oversold assets do not necessarily turn around right away. That means it is beneficial to get confirmation from another trade signal before acting on RSI.
Key Takeaways
- The MACD can confirm that it is time to buy or sell when RSI indicates a security is oversold or overbought.
- Moving average crossovers can also help RSI users to pinpoint the right time to make a trade.
- Smoothed RSI applies the moving average procedure to RSI itself, making the indicator less twitchy and leading to fewer false positives.
- Long-term RSI uses RSI on a longer time scale, such as weeks or months, to identify a larger trend and ensure that short-term RSI trades are going in the right direction.
- RSI can also help identify uptrends and downtrends for use with Jessie Livermore's pivotal point system.
How Does the RSI Work?
RSI readings range from zero to 100, with readings above 70 generally interpreted as indicating overbought conditions and readings below 30 indicating oversold conditions. Since the RSI measures the magnitude of recent price movements, it is prone to generating false signals following sudden, sizable price changes.
Generally, as an asset's price rises, the RSI will rise as well because average gains will outstrip average losses. When the asset price falls, losses typically outstrip gains, causing the indicator to fall.
Calculating RSI is usually very time-consuming. However, RSI is popular enough that charting websites and software programs will frequently do all the math and create easy-to-interpret graphs.
Moving Average Convergence Divergence (MACD)
One technical indicator that can be used in conjunction with the RSI and helps confirm the validity of RSI indications is another widely-used momentum indicator, the moving average convergence divergence (MACD). This indicator calculates momentum differently from the RSI by comparing the relative positions of a short- and long-term moving average.
Traders primarily monitor the MACD for signs of momentum diverging from price. While the price may continue to move up, with the RSI maintaining overbought readings for quite some time, the MACD shows divergence by beginning to turn down as the price continues to advance. That provides an additional indication confirming that a market may be reaching a level where it is overextended and, therefore, likely to retrace soon.
The MACD and RSI are both contrarians by design. They go against popular opinion by signaling to buy when there is a lot of selling and signaling to sell when there is significant buying. When both indicate buying, then the security is more likely to be genuinely oversold. Similarly, the security is probably overbought and headed downward when both RSI and MACD generate sell signals.
Moving Average Crossovers
Moving average crossovers can also be used to confirm RSI indications that a market is overbought or oversold. RSI is often used to obtain an early sign of possible trend changes. Therefore, adding exponential moving averages (EMAs) that respond more quickly to recent price changes can help.
Relatively short-term moving average crossovers, such as the 5 EMA crossing over the 10 EMA, are best suited to complement RSI. The 5 EMA crossing from above to below the 10 EMA confirms the RSI's indication of overbought conditions and possible trend reversal. Conversely, an upside crossover provides an additional indication that a market might be oversold.
Smoothed RSI
It is also possible to apply the EMA process to the RSI itself to obtain the smoothed RSI indicator. The smoothed RSI is much less twitchy than the RSI indicator, leading to far fewer false positives and better-defined trends. On the other hand, smoothing RSI with an EMA also makes RSI slower to respond to genuine changes because all EMAs add lagged variables.
Long-Term RSI
Although traders generally use RSI on smaller time scales, it can be used with weeks or even months as inputs instead of days, hours, or minutes. By using a longer time scale, it is possible to align short-term trades with long-term trends. If the monthly RSI is still reasonably low and rising, then a daily RSI buy signal is more likely to succeed.
Similarly, a high and declining monthly RSI suggests that a daily RSI buy sign is probably a false positive. Finally, a daily RSI buy signal could mark the beginning of a new bull market if the monthly RSI is very low and declining.
Livermore's Pivotal Points
RSI can also be combined with legendary trader Jessie Livermore's pivotal points system, which should not be confused with pivot points. There has been a lot written on pivotal points. However, the basic idea is that if a security makes a low and then makes a second lower low, the first low becomes a pivotal point. If the security's price rises above that pivotal point, the downtrend has ended, and it might be time to buy.
What gives many traders trouble with Livermore's system is figuring out when a downtrend has gone far enough for pivotal points to work. RSI, with its clean zero to one hundred range, makes this easy. When RSI is below 30 and a bullish reversal pivotal point occurs, a buy is more likely to produce profits than when either of these signals occurs alone.
As is well-known, Livermore liked playing the bear-side better, so it is possible to reverse the procedure for selling and shorting. When a security makes a high followed by a second higher high, then the first high becomes a bearish reversal pivotal point. Suppose the security's price falls below that pivotal point, and RSI is still above 70. In that case, it is probably time to sell the security and maybe time to sell it short. Furthermore, Livermore's pivotal points can also be used with smoothed RSI for better-defined uptrends and downtrends.
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FAQs
RSI is often used to obtain an early sign of possible trend changes. Therefore, adding exponential moving averages (EMAs) that respond more quickly to recent price changes can help. Relatively short-term moving average crossovers, such as the 5 EMA crossing over the 10 EMA, are best suited to complement RSI.
Is there a better indicator than RSI? ›
The formula for the MFI, on the other hand, uses a typical price and compares it with several different evaluations of money flows in and out of the security. 1 Based on the theory that volume precedes price, the MFI acts as a more ambitious leading indicator than the RSI.
How can I make my RSI more accurate? ›
A way some successful day traders have found to increase the accuracy or buy and sell triggers from RSI is by changing the definition of oversold and overbought to the 20 and 80 levels , or indeed other levels.
What is the best combination with RSI? ›
RSI is often used to obtain an early sign of possible trend changes. Therefore, adding exponential moving averages (EMAs) that respond more quickly to recent price changes can help. Relatively short-term moving average crossovers, such as the 5 EMA crossing over the 10 EMA, are best suited to complement RSI.
What is the 2 period RSI strategy? ›
Developed by Larry Connors, the 2-period RSI strategy is a fairly simple mean-reversion trading strategy designed to buy or sell securities after a corrective period. Traders should look for buying opportunities when 2-period RSI moves below 10, which is considered deeply oversold.
What is the 5 star RSI strategy? ›
The 5-Star Relative Strength Index (RSI) Strategy-Short
If a bearish candle is formed at the 60 RSI level, the prices may bounce back from there, and one can enter the stock for shorting. The stoploss can be placed at the high of that bearish candlestick, and the target can be the 40 Relative Strength Index levels.
What is the triple RSI strategy? ›
This strategy is commonly used both in forex and stock markets for reversal trading. when the rsi line reaches and crosses simultaneously at 3 rsi setups i.e at 7, 14, and 21, a signal is generated. This strategy works best in 1-hour timeframe.
What is the best length for RSI indicator? ›
So what period of RSI should intraday traders should choose? Although the default setting is 14, the intraday traders usually prefer a range of 8-11 periods. Now this range is reduced to increase the sensitivity and also to monitor the market closely so that you can efficiently trade within minutes.
What makes RSI worse? ›
direct pressure to particular areas. carrying heavy loads. fatigue. increased psychological stress has been shown to to worsen RSI.
What are 2 tips for preventing RSI? ›
There are things you can do to help reduce your risk of getting RSI, such as:
- maintaining good posture at work.
- taking regular breaks from long or repetitive tasks – it's better to take smaller, more frequent breaks than one long lunch break.
- trying breathing exercises if you're stressed.
Since an oscillator (RSI) gives early signals of trend change and a trending indicator (say EMA crossover) gives late signals, we can use a simple combination of an RSI followed by an EMA crossover to try to eliminate false Buy/Sell signals and as a better indication of a change in trend.
What is the RSI 50 50 strategy? ›
50-crossover
Traders could use the RSI 50 level (the centreline) to confirm that a price trend is occurring. According to this strategy, a downward trend is confirmed when the RSI crosses from above 50 to below 50. Similarly, an upward trend is confirmed when the RSI crosses above 50.
Can I use RSI and stochastic together? ›
The next strategy useful in performing swing trades is a combination of two technical indicators RSI and Stochastics. The above price chart of ICICI Bank (NSE: ICICIBANK) shows us the power of this strategy.
What is the most used RSI period? ›
The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively.
When to buy and sell on RSI? ›
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals.
What is the formula for RSI? ›
The RSI formula can be calculated using the mean changes in closing prices for a certain period. = Umean / Dmean.
What are the most popular RSI settings? ›
The common levels to pay attention to when trading with the RSI are 70 and 30. An RSI of over 70 is considered overbought. When it below 30 it is considered oversold. Trading based on RSI indicators is often the starting point when considering a trade, and many traders place alerts at the 70 and 30 marks.
What is the best indicator for a 5 min chart? ›
Therefore, the exponential moving average may be considered the best moving average for a 5 min chart. A 20-period moving average will suit best. The MACD indicator is based on the exponential moving averages. Usually, it consists of two lines and a histogram.
What is the most accurate indicator of overbought oversold? ›
Two of the most common charting indicators of overbought or oversold conditions are relative strength index (RSI) and stochastics. Developed by J. Welles Wilder Jr. and introduced in the 1978 book New Concepts in Technical Trading Systems, RSI is a measurement of stock price change momentum.
What is the best RSI length for a 4 hour chart? ›
For the trading with long position holding on the 4-hour chart, consider RSI with the Period = 14 and more.
Symptoms and Causes
- Pain.
- Swelling.
- Tingling.
- Numbness.
- Stiffness.
- Weakness.
- Sensitivity to cold or heat.
Many people also turn to complementary therapies to treat the symptoms of RSI, including chiropractic, osteopathy, acupuncture, reflexology, the Alexander technique and massage therapy. Exercise such as swimming may also be useful in easing some of the symptoms such as muscle stiffness.
How long does it take to cure RSI? ›
With appropriate modifications to the activity causing RSI and simple treatments as outlined above, most people with RSI recover within three to six months.
What is the weakness of RSI? ›
Here are just a few of the limitations traders could encounter when using RSI: RSI isn't always helpful, since it can move without featuring a clear trend for a long time. It can send misleading signals. RSI can remain at an overbought level or oversold level for a long time, hence…
How often should you take breaks to prevent RSI? ›
Take regular breaks
You should take a five minute break after every 20 or 30 minutes of continuous activity. If you are suffering from RSI you should take more frequent and longer breaks.
Which key is used to reduce repetitive strain? ›
'Sticky keys' is an accessibility feature of some graphical user interfaces which assists users who have physical disabilities or help users reduce repetitive strain injury.
What technical indicators work well together? ›
Best Combination Chart of Technical Indicators
| Best Combination of Technical Indicators for Intraday Trading |
| Momentum | Trend | Volatility |
| Stochastic Oscillator | ADX | Bollinger Bands |
| RSI | Parabolic SAR | ATR |
| MACD | Moving Averages | Standard Deviation |
1 more rowDec 21, 2021
The STC indicator is a forward-looking, leading indicator, that generates faster, more accurate signals than earlier indicators, such as the MACD because it considers both time (cycles) and moving averages.
How reliable is RSI indicator? ›
The RSI compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart. Like most technical indicators, its signals are most reliable when they conform to the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms.
Which indicator is better MACD or RSI? ›
The same study by Business Perspective indicates that, as compared to the MACD indicator, RSI is more reliable in a non-trending market. A non-trending market refers to a market situation when the market is not taking up a particular trend.
RSI has slightly better performance than MACD. If we test major currency pairs where entry position is generated by MACD or RSI and set 1 Daily ATR stop loss and 1 Daily ATR target price as an exit strategy, we can see that in 52% of cases, MACD is profitable, and in 52.8% RSI is profitable.
Which is better stochastic RSI or MACD? ›
Separately, the two indicators function on different technical premises and work alone; compared to the stochastic, which ignores market jolts, the MACD is a more reliable option as a sole trading indicator.
Why the RSI is the best indicator? ›
Why Is RSI Important? Traders can use RSI to predict the price behavior of a security. It can help traders validate trends and trend reversals. It can point to overbought and oversold securities.
Can I use MACD and RSI together? ›
While both are considered momentum indicators, the MACD measures the relationship between two EMAs, while the RSI measures price change in relation to recent price highs and lows. These two indicators are often used together to provide analysts a more complete technical picture of a market.
Should you buy when RSI is high? ›
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals. The S&P 500's RSI suggests the recent rally has room to continue.
Why is MACD the best indicator? ›
The MACD indicator is the most popular tool in technical analysis because it gives traders the ability to quickly and easily identify the short-term trend direction.
What is the MACD triple strategy? ›
The MACD Triple strategy is a typical multiple time frames strategy. These strategies base themselves on one or more technical indicators which are analyzed in parallel in different but related time frames. The higher time frames usually serve as a trend filter for the signals.
What is the best time frame for MACD? ›
MACD is best used with daily periods, where the traditional settings of 26/12/9 days is the norm. MACD triggers technical signals when the MACD line crosses above the signal line (to buy) or falls below it (to sell).
