Relative strength index: Bulls vs Bears

Relative strength index: Bulls vs Bears

2023-01-26 • Updated

What does the RSI tell?

The relative strength index (RSI) is an indicator used in technical analysis to measure the momentum of recent price changes. It helps traders to see whether a stock, a currency pair, or other asset is overbought or oversold. The RSI is presented as an oscillator (a line chart that moves between two extremes) and can have a reading from 0 to 100.

The standard is to use 14 periods to calculate the initial RSI value. The RSI will rise as the number and size of positive closes increase, and it will fall as the number and size of negative closes increase.

Interpretation of the RSI ranges

Generally, when the RSI crosses the horizontal 30 reference level from below, it is a bullish sign, and when it slides below the horizontal 70 reference level, it is a bearish sign. Put another way, one can interpret that RSI values of 70 or above indicate an asset is overbought or overvalued and may be primed for a trend reversal or corrective price pullback. An RSI of 30 or below indicates an oversold or undervalued condition.

During trends, the RSI may fall into a band or range. During an uptrend, the RSI tends to stay above 30 and should frequently hit 70. During a downtrend, it is rare to see the RSI exceed 70, and the indicator frequently hits 30 or below. These guidelines can help determine trend strength and spot potential reversals. For example, if the RSI can’t reach 70 on several consecutive price swings during an uptrend, but then drops below 30, the trend has weakened and could be reversing down.

On the contrary, if the downtrend is unable to reach 30 or below and then rallies above 70 it means that the downtrend has weakened and could be reversing to the upside. Trend lines and moving averages can also help with the analysis.

Best trading techniques with the RSI

The RSI is a multifunctional indicator. It presents not the only price over/undervaluation but can provide traders with many signals, such as divergence and patterns.

Let’s dive into an example and figure out what is the best way to use this oscillator.

Divergence

Divergence.png

A bullish RSI divergence occurs when the indicator forms higher lows, but, at the same time, the price shows lower minimums. This indicates rising bullish momentum. A break above oversold territory can be used to trigger a long new position.

A bearish RSI divergence occurs when the indicator forms lower highs, but, at the same time, the price shows higher maximums.

The moment when the first green bar appears and the divergence is confirmed, a trader may open a trade with a Stop Loss under a recent low.

Swing Rejections

Picture1.png

Another trading technique examines the RSI’s behavior when it is reemerging from overbought or oversold territory. The typical swing rejection consists of 4 parts.

  • The RSI gets lower (in this case) than 30.
  • The RSI returns above 30.
  • The RSI forms another dip without getting below 30.
  • The RSI breaks through the most recent high.

The moment of breakout is the trader’s entry point. Stop-loss sets under the recent low.    

Accumulation

NETFLIXWeekly.png

When a price is staying in the range and RSI moves inside a channel, it means that investors (traders) accumulate powers for the next move. Usually, during these moments, the RSI gets into the 40-60 range and after that, a channel gets broken and massive movements begin.

Patterns

голова плечи.png

Another great thing about RSI is that patterns work as usual. On the chart above traders couldn’t notice the trend reversal according to the price action, but the “Head with Shoulders” pattern appeared on the RSI. As soon as the RSI line crossed the shoulder line the price went down.

Conclusion

  • The RSI compares bullish and bearish price momentum and shows a result on the oscillator below a price chart.
  • The RSI could be used to predict the end of correction during a trend.
  • It could be used on the biggest time frames for defying trend reversal.
  • During a flat market, it might be used as a signal of bulls/bears power accumulation.
  • RSI patterns work as usual ones.

START TRADING WITH THIS INDICATOR

Similar

Pin Bar Trading Strategy
Pin Bar Trading Strategy

Sometimes a chart or a candlestick pattern may provide a decent entry signal if it is located at a certain level. A pin bar is one of the most reliable and famous candlestick patterns, and when traders see it on the chart, they expect the price to change its direction soon.

Frequently asked questions

  • How to start trading?

    If you are 18+ years old, you can join FBS and begin your FX journey. To trade, you need a brokerage account and sufficient knowledge on how assets behave in the financial markets. Start with studying the basics with our free educational materials and creating an FBS account. You may want to test the environment with virtual money with a Demo account. Once you are ready, enter the real market and trade to succeed.

  • How to open an FBS account?

    Click the 'Open account' button on our website and proceed to the Trader Area. Before you can start trading, pass a profile verification. Confirm your email and phone number, get your ID verified. This procedure guarantees the safety of your funds and identity. Once you are done with all the checks, go to the preferred trading platform, and start trading.

  • How to withdraw the money you earned with FBS?

    The procedure is very straightforward. Go to the Withdrawal page on the website or the Finances section of the FBS Trader Area and access Withdrawal. You can get the earned money via the same payment system that you used for depositing. In case you funded the account via various methods, withdraw your profit via the same methods in the ratio according to the deposited sums.

Deposit with your local payment systems

Data collection notice

FBS maintains a record of your data to run this website. By pressing the “Accept” button, you agree to our Privacy policy.

Callback

A manager will call you shortly.

Change number

Your request is accepted.

A manager will call you shortly.

Next callback request for this phone number
will be available in

If you have an urgent issue please contact us via
Live chat

Internal error. Please try again later

Don’t waste your time – keep track of how NFP affects the US dollar and profit!

You are using an older version of your browser.

Update it to the latest version or try another one for a safer, more comfortable and productive trading experience.

Safari Chrome Firefox Opera