Traders use various trading strategies to trade efficiently and accurately. These technical indicators are easily adaptable and easy to deploy. Relative Strength Index is one of the most widely used eminent technical indicators. It is a technical index used in the study of financial market or stock markets. The traders keep RSI indicator in the category of momentum oscillator, which measures the speed and the direction of the price movements. The momentum of the price implies the rate of rise and fall in the price of the assets. The RSI calculates the percentage of the higher closes to the lower closes. All those stocks having the stronger positive changes have the higher value of RSI as compare to the stocks having the stronger negative changes. Usually the RSI is implemented on a timeframe of 14-days. However, traders manipulate the time and use RSI for any timeframe. Relative strength index is the most commonly used technical indicator for analyzing the stock all over the world. RSI is calculated on the scale from zero to 100, where the point 70 is marked to be high level and the point 30 is marked to low level. The analysts consider the levels of 80 and 20 as extreme high levels and low levels correspondingly and 90 and 10 are the less occurred levels, which show the stronger momentum.
Overbought and oversold
As discussed in the above paragraph that Wilder considered RSI overbought level when the value is above 70 and RSI oversold level
As per Wilder, the bullish divergence occurs when the price of stock makes lower low and the RSI makes higher low. The divergence indicates the possible reversal point in the chart. If RSI does not show the new low then this is considered as strongest momentum. When the price of stock makes higher high and the RSI makes lower high, bearish divergence occurs. If RSI does not show the new high then this is considered as weakening momentum.
Failure swings are not dependant on the price action as they focus mainly on RSI to generate signals. It simply ignores the concept of divergences. When the RSI moves below 30 at stage of oversold then the bullish failure swing occurs. The RSI bounces above 30, pulls back and holds above 30 and then breakdown its previous high. The breakdown occurs in manner to reach oversold levels and then goes higher low on top of oversold levels.
RSI tends to oscillate between the ranges of 0 to 100. RSI swings between 40 and 90 to indicate the bull market or uptrend. Depending on the RSI parameters volatility and strength of the trend, these values may vary. The RSI rushed above 70 in late year 2003 and then moved into range of 40-90, which is bullish market range.
One of the famous technical analysts Andrew Cardwell introduced the positive and negative reversals for RSI. This concept was opposite of bearish and bullish divergences. Bearish divergence acts as bull market occurrence and the bullish divergence acts as bear market occurrence. The positive reversals occur, when RSI fakes lower low and the stock forms a higher low.
The opposite of positive reversal is negative reversal. The negative reversals occur, when the RSI forms higher high and the stock forms lower high. Usually, higher high is below overbought levels in the range of 50-70.
As we have noticed above that, the RSI is a flexibly adaptable momentum oscillator, which has always been a most preferred technical indicator among technical analysts. It was great indicator in the days of Wilder and even now, it remains relevant.