The RSI momentum oscillator is designed to measure
velocity & magnitude of price movements.
RSI is the Relative Strength Indicator. The RSI computes momentum as the ratio of higher closes to lower closes, usually over a 14 day period.
Momentum is the rate of the move in price (in an upward or downward direction).
If a market has had more or stronger positive changes the RSI will increase & vice versa.
If prices have been closing higher on the day, more often than they have been closing lower over a 14 day period, the RSI will rise.
The RSI is typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 or 80 and 30 or 20
Traditionally, RSI readings greater than the 70/80 level are considered to be in overbought territory.
RSI readings lower than the 30/20 level are considered to be in oversold territory.
In between the 30 and 70 level is considered neutral, with the 50 level a sign of no trend
In fact the 50 level is often seen as both the support and resistance line for the indicator.
Uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and 20
Divergence between RSI and price action is a very strong indication that a market turning point is imminent.
Bearish divergence occurs when price makes a new high but the RSI makes a lower high, thus failing to confirm.
This means that if prices are trending higher but the RSI has begun to trend lower, there is a negative divergence – this is a warning to bulls (or investors) that the up trend may be about to end.
Prices may be more likely to begin to trend sideways or turn lower. But this is not guaranteed.
The RSI can remain in overbought territory for a long time in a bull market – just because the RSI is overbought or has been overbought for a while, does not guarantee that prices will reverse soon.
The RSI value can never exceed 100 & therefore cannot continue higher indefinitely, no matter how long the price continues to trend higher.
Never sell a financial instrument or commodity purely based on an overbought RSI reading.
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