Relative Strength Index

The Relative Strength Index is a banded oscillator which ranges from zero to 100. It attempts to display overbought and oversold zones of price action. A level over 70 is typically overbought. A level under 30 is typically oversold. When the RSI price line moves into these zones, the indicator shows an actually overbought or oversold reading.

Signals are interpreted with a mix of positioning, divergences, extremes, and existing trend. Divergences are regarded as the strongest and most important signal, and should be watched closely. Divergences in extremes, above 70, or below 30, are especially important.

Buy signals are given if the Relative Strength Index is in the oversold zone (below 30) with a bullish divergence. A bullish divergence is confirmed by price rising above and closing higher than the first trough which created the divergence. Wait for a full trough to form higher for more certainty. A cross above 30 gives confirmation of a buy signal.

Sell signals are given if the Relative Strength Index is in the overbought zone (above 70) with a bearish divergence. A bearish divergence is confirmed by price falling below and closing lower than the first peak which created the divergence. For added safety, a trader can wait for a full peak to form below the first peak in the divergence. A fall below 70 gives confirmation of a sell signal.

Filtering with the existing trend helps ensure accuracy, but also limits signals. You’d only buy in the uptrend, and you’d only sell in the downtrend. To actually trigger the trade, wait for the the Relative Strength Index price line to exit the oversold or overbought zone.