RSI oscillator, in-demand and indicative

Master class: Exchange technical indicators. Indicator 4

Relative Strength Index, RSI indicator - one of the most popular oscillators created by Welles Wilder. RSI measures the relative change in the highest and lowest closing prices.

The oscillator variation range is from 0 to 100. The following zones are distinguished on the oscillator chart:

– overbought zone - values from 75 and above - is considered optimal for sale.
– oversold zone - values of 25 or less is considered optimal for purchase.

During strong trend movements, the overbought and oversold zones are 80 and 20, and during sideways price movements they are 70 and 30 respectively.

Formula for calculating RSI indicator values

The basic formula for calculating the RSI Relative Strength Index:

RSI = 100 - (100 / (1 + U / D)), in which:

– U - average value of positive price changes;
– D - average value of negative price changes.

Interpretation of RSI indicator signals

When technically analyzing charts, the following RSI indicator signals are distinguished:

- Tops and bases
The tops on the oscillator chart are often formed in the "overbought" zone, and the bases - in the "oversold" zone, and they are often ahead of the corresponding formation of tops and bases on the price chart.

- Graphical models
The RSI chart forms technical analysis graphical patterns (""head and shoulders", "triangles"), which may not be present on the price chart.

- Support or resistance level breakout
Sometimes situations arise on the oscillator chart where the RSI rises above the previous high and forms a new peak, or falls below the previous low and forms a new trough.

- Support and resistance levels
The RSI oscillator chart may show support and resistance levels more clearly than the price chart.

- Discrepancies
In case of divergence formation, there is usually a price correction in the direction of the RSI oscillator movement.

Application of RSI indicator

The creator of the Relative Strength Index W. Wilder recommended using a 14-period RSI oscillator. Later on, 9- and 25-period RSIs became widespread. The most common method of analyzing the oscillator is to look for divergences when the price forms a new maximum, and the RSI chart does not exceed the level of the previous maximum. In this case, the divergence signals the probability of a price reversal. If, after a divergence situation, the indicator turns downward and falls below its previous minimum value, it completes the so-called "failed swing", which is considered a confirming signal of an imminent price reversal.

Figure 1. The so-called "failed spread".