RSI Fluctuations to Confirm Trends

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The RSI, or Relative Strength Index, is a popular technical indicator, and has many different uses. By looking at the range the RSI is fluctuating in, it is often possible to tell whether a price trend is likely to continue, or if it is reversing.

The RSI falls into a family of indicators called “oscillators.” The indicator moves back and forth between 100 and 0 (rarely reaching those extremes) as the price moves up and down.

As figure 1 shows, the RSI is highly correlated to the price, rising and falling as price does. The RSI will fluctuate to varying degrees though, since it is always comparing the magnitude of recent price gains to recent price losses and then converting it into a number between 100 and 0.

Figure 1. Apple (AAPL) stock with RSI Indicator

The levels that the RSI fluctuates between, let’s call it the RSI range, can help determine and confirm the trend.

During an uptrend the RSI will almost always have peaks above 80–often 90 in a strong trend–and will create lows above 30. Levels may vary slightly between individual stocks, or across markets, but these are a good general guideline.

As figure 2 shows, during the uptrend, the RSI continually reaches peaks of 80 or higher, and holds the 30 area on lows (pullbacks in price).

Figure 2. S&P 500 SPDR (SPY) with RSI Uptrend Range

Seeing the RSI continually reach the 80 region provides confirming evidence that the uptrend is still strong.

The RSI holding above 30 also provides confirming evidence. The indicator is not perfect though. We can see on a number of occasions the price dipped slightly below the 30 level even though the overall trend remained up.

During a downtrend the RSI will generally touch 20 or below–reaching to 10 on strong downtrend moves–and create highs below 70 (60 in some markets).

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Figure 3. Apple (AAPL) stock With RSI Downtrend Range

Throughout the downtrend Apple isn’t able to claw much above 70, and continually reaches lows of 20 or lower. These factors help confirm the downtrend.

At the far right of the chart, there is a green arrow on the RSI. It marks a point where the RSI extends well above the downtrend RSI range, reaching 91. This generally doesn’t happen during a downtrend, so it is a warning sign that the trend may be reversing, or the price is entering a sideways phase.

That green arrow, and the associated move higher, occurred just after the start of May 2020. If you look back to figure 1, that point was the beginning of the uptrend shown on that chart.

“Wilder’s RSI” uses a slightly different calculation, and seems to work a bit better at confirming trends using the above method. Since not all charting platforms have Wilder’s RSI, the standard RSI has been used for the above examples. When possible, use Wilder’s RSI.

Bring it Together

RSI ranges are a tool, but are not infallible. While the uptrend and downtrend ranges can confirm trends and warn of reversals, it is always advised that price analysis is done as well. For example, in an uptrend if the RSI dips a little below 30 but the price is still making higher-highs and higher-lows, then trust the price action. Ultimately price is what makes us money, and indicators just help us interpret price moves.

Levels may vary by individual stock, forex pair or other instrument, therefore, establish the appropriate ranges for the instrument you are trading using historical data. This will provide you a baseline to work from. If you like this method, come up with some personal guidelines on how to use it and incorporate it into your trading plan.

Overbought or Oversold? Use the Relative Strength Index to Find Out

The Relative Strength Index (RSI) describes a momentum indicator that measures the magnitude of recent price changes in order to evaluate overbought or oversold conditions in the price of a stock or other asset. Originally developed by noted American technical analyst J. Welles Wilder Jr., who introduced the concept in his seminal 1978 book, “New Concepts in Technical Trading Systems,” the RSI is displayed as an oscillator, which is a line graph that moves between two extremes. Its reading can range from 0 to 100.

The primary trend of the stock or asset is an important tool used to ensure that the indicator’s readings are properly understood. Well-known market technician Constance Brown has widely promoted the idea that an oversold reading on the RSI that occurs in an uptrend is likely much higher than 30%, and an overbought reading on the RSI that occurs during a downtrend is much lower than 70%.

Traditional interpretation and usage of the RSI dictates that values of 70 or above suggest that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective price pullback. An RSI reading of 30 or below indicates an oversold or undervalued condition.

Key Takeaways

  • In finance, the Relative Strength Index (RSI) is a type of momentum indicator that looks at the pace of recent price changes so as to determine whether a stock is ripe for a rally or a selloff.
  • The RSI is used by market statisticians and traders, in addition to other technical indicators as a means of identifying opportunities to enter or exit a position.
  • Generally, when the RSI surpasses the horizontal 30 reference level, it is a bullish sign and when it slides below the horizontal 70 reference level, it is a bearish sign.

Overbought and Oversold Levels

In terms of market analysis and trading signals, when the RSI moves above the horizontal 30 reference level, it is viewed as a bullish indicator.

Conversely, an RSI that dips below the horizontal 70 reference level is viewed as a bearish indicator. Since some assets are more volatile and move quicker than others, the values of 80 and 20 are also frequently-used overbought and oversold levels.

Trend Trading: The 4 Most Common Indicators

Trend traders attempt to isolate and extract profit from trends. There are multiple ways to do this. Of course, no single indicator will punch your ticket to market riches, as trading involves factors such as risk management and trading psychology as well. But certain indicators have stood the test of time and remain popular among trend traders.

In this article, we provide general guidelines and prospective strategies for each of the four common indicators. Use these or tweak them to create your own personal strategy.

Moving Averages

Moving averages “smooth” price data by creating a single flowing line. The line represents the average price over a period of time. Which moving average the trader decides to use is determined by the time frame in which he or she trades. For investors and long-term trend followers, the 200-day, 100-day, and 50-day simple moving average are popular choices.

There are several ways to utilize the moving average. The first is to look at the angle of the moving average. If it is mostly moving horizontally for an extended amount of time, then the price isn’t trending, it is ranging. If the moving average line is angled up, an uptrend is underway. Moving averages don’t predict though; they simply show what the price is doing, on average, over a period of time.

Crossovers are another way to utilize moving averages. By plotting a 200-day and 50-day moving average on your chart, a buy signal occurs when the 50-day crosses above the 200-day. A sell signal occurs when the 50-day drops below the 200-day.   The time frames can be altered to suit your individual trading time frame.

When the price crosses above a moving average, it can also be used as a buy signal, and when the price crosses below a moving average, it can be used as a sell signal. Since the price is more volatile than the moving average, this method is prone to more false signals, as the chart above shows.

Moving averages can also provide support or resistance to the price.   The chart below shows a 100-day moving average acting as support (i.e., price bounces off of it).

MACD (Moving Average Convergence Divergence)

The MACD is an oscillating indicator, fluctuating above and below zero. It is both a trend-following and momentum indicator.

One basic MACD strategy is to look at which side of zero the MACD lines are on in the histogram below the chart. Above zero for a sustained period of time, and the trend is likely up; below zero for a sustained period of time, and the trend is likely down.   Potential buy signals occur when the MACD moves above zero, and potential sell signals when it crosses below zero.

Signal line crossovers provide additional buy and sell signals. A MACD has two lines—a fast line and a slow line. A buy signal occurs when the fast line crosses through and above the slow line. A sell signal occurs when the fast line crosses through and below the slow line.

RSI (Relative Strength Index)

The RSI is another oscillator, but because its movement is contained between zero and 100, it provides some different information than the MACD.

One way to interpret the RSI is by viewing the price as “overbought”—and due for a correction—when the indicator in the histogram is above 70, and viewing the price as oversold—and due for a bounce—when the indicator is below 30.   In a strong uptrend, the price will often reach 70 and beyond for sustained periods, and downtrends can stay at 30 or below for a long time. While general overbought and oversold levels can be accurate occasionally, they may not provide the most timely signals for trend traders.

An alternative is to buy near oversold conditions when the trend is up and place a short trade near an overbought condition in a downtrend.

Say the long-term trend of a stock is up. A buy signal occurs when the RSI moves below 50 and then back above it. Essentially, this means a pullback in price has occurred, and the trader is buying once the pullback appears to have ended (according to the RSI) and the trend is resuming. The 50 levels are used because the RSI doesn’t typically reach 30 in an uptrend unless a potential reversal is underway. A short-trade signal occurs when the trend is down and the RSI moves above 50 and then back below it.

Trendlines or a moving average can help establish the trend direction and in which direction to take trade signals.

On-Balance Volume (OBV)

Volume itself is a valuable indicator, and OBV takes a lot of volume information and compiles it into a single one-line indicator. The indicator measures cumulative buying/selling pressure by adding the volume on up days and subtracting volume on down days.

Ideally, the volume should confirm trends. A rising price should be accompanied by a rising OBV; a falling price should be accompanied by a falling OBV.

The figure below shows the shares of Netflix Inc. (NFLX) trending higher along with OBV. Since OBV didn’t drop below its trendline, it was a good indication that the price was likely to continue trending higher after the pullbacks.

If OBV is rising and the price isn’t, price is likely to follow the OBV and start rising. If the price is rising and OBV is flat-lining or falling, the price may be near a top. If the price is falling and OBV is flat-lining or rising, the price could be nearing a bottom.

The Bottom Line

Indicators can simplify price information, as well as provide trend trade signals or warn of reversals. Indicators can be used on all time frames, and have variables that can be adjusted to suit each trader’s specific preferences. Combine indicator strategies, or come up with your own guidelines, so entry and exit criteria are clearly established for trades. Each indicator can be used in more ways than outlined. If you like an indicator, research it further, and most importantly, test it out before using it to make live trades.

Learning to trade on indicators can be a tricky process. For those who have yet to enter the market or start trading, it’s important to know that a brokerage account is a necessary first step at getting access to the stock market.

Relative Strength Index (RSI)

Contents

DEFINITION

The Relative Strength Index (RSI) is a well versed momentum based oscillator which is used to measure the speed (velocity) as well as the change (magnitude) of directional price movements. Essentially RSI, when graphed, provides a visual mean to monitor both the current, as well as historical, strength and weakness of a particular market. The strength or weakness is based on closing prices over the duration of a specified trading period creating a reliable metric of price and momentum changes. Given the popularity of cash settled instruments (stock indexes) and leveraged financial products (the entire field of derivatives); RSI has proven to be a viable indicator of price movements.

HISTORY

J.Welles Wilder Jr. is the creator of the Relative Strength Index. A former Navy mechanic, Wilder would later go on to a career as a mechanical engineer. After a few years of trading commodities, Wilder focused his efforts on the study of technical analysis. In 1978 he published New Concepts in Technical Trading Systems. This work featured the debut of his new momentum oscillator, the Relative Strength Index, better known as RSI.

Over the years, RSI has remained quite popular and is now seen as one of the core, essential tools used by technical analysts the world over. Some practitioners of RSI have gone on to further build upon the work of Wilder. One rather notable example is James Cardwell who used RSI for trend confirmation.

CALCULATION

For a practical example, the built-in Pine Script function rsi(), could be replicated in long form as follows.

“rsi”, above, is exactly equal to rsi(close, 14).

THE BASICS

As previously mentioned, RSI is a momentum based oscillator. What this means is that as an oscillator, this indicator operates within a band or a set range of numbers or parameters. Specifically, RSI operates between a scale of 0 and 100. The closer RSI is to 0, the weaker the momentum is for price movements. The opposite is also true. An RSI closer to 100 indicates a period of stronger momentum.

– 14 days is likely the most popular period, however traders have been known to use a wide variety of numbers of days.

WHAT TO LOOK FOR

Overbought/Oversold

Wilder believed that when prices rose very rapidly and therefore momentum was high enough, that the underlying financial instrument/commodity would have to eventually be considered overbought and a selling opportunity was possibly at hand. Likewise, when prices dropped rapidly and therefore momentum was low enough, the financial instrument would at some point be considered oversold presenting a possible buying opportunity.

There are set number ranges within RSI that Wilder consider useful and noteworthy in this regard. According to Wilder, any number above 70 should be considered overbought and any number below 30 should be considered oversold.

An RSI between 30 and 70 was to be considered neutral and an RSI around 50 signified “no trend”.

– Some traders believe that Wilder’s overbought/oversold ranges are too wide and choose to alter those ranges. For example, someone might consider any number above 80 as overbought and anything below 20 as oversold. This is entirely at the trader’s discretion.

This is an interactive chart. Users have the ability to scroll through the embedded chart or click on “Make it Live” to open the full chart in a separate browser window.

Divergence

RSI Divergence occurs when there is a difference between what the price action is indicating and what RSI is indicating. These differences can be interpreted as an impending reversal. Specifically there are two types of divergences, bearish and bullish.

Bullish RSI Divergence – When price makes a new low but RSI makes a higher low. Bearish RSI Divergence – When price makes a new high but RSI makes a lower high.

– Wilder believed that Bearish Divergence creates a selling opportunity while Bullish Divergence creates a buying opportunity.

This is an interactive chart. Users have the ability to scroll through the embedded chart or click on “Make it Live” to open the full chart in a separate browser window.

Failure Swings

Failure swings are another occurrence which Wilder believed increased the likelihood of a price reversal. One thing to keep in mind about failure swings is that they are completely independent of price and rely solely on RSI. Failure swings consist of four “steps” and are considered to be either Bullish (buying opportunity) or Bearish (selling opportunity).

Bullish Failure Swing

  1. RSI drops below 30 (considered oversold).
  2. RSI bounces back above 30.
  3. RSI pulls back but remains above 30 (remains above oversold)
  4. RSI breaks out above its previous high.

Bearish Failure Swing

  1. RSI rises above 70 (considered overbought)
  2. RSI drops back below 70
  3. RSI rises slightly but remains below 70 (remains below overbought)
  4. RSI drops lower than its previous low.

CARDWELL’S TREND CONFIRMATIONS

Of course no one indicator is a magic bullet and almost nothing can be taken simply at face value. Andrew Cardwell, who was mentioned earlier, was one of those students who took Wilder’s RSI interpretations and built upon them. Cardwell’s work with RSI led to RSI being a great tool not just for anticipating reversals but also for confirming trends.

Uptrends/Downtrends

Cardwell made keen observations while studying Wilder’s ideas of divergence. Cardwell believed that:

  • Bullish Divergence only occurs in a Bearish Trend.
  • Bearish Divergence only occurs in an Bullish Trend.
  • Both Bullish and Bearish Divergence usually cause a brief price correction and not an actual trend reversal.

This is an interactive chart. Users have the ability to scroll through the embedded chart or click on “Make it Live” to open the full chart in a separate browser window.

What this means is that essentially Divergence should be used as a way to confirm trends and not necessarily anticipate reversals.

Reversals

Cardwell also discovered what are referred to as Positive and Negative Reversals. Positive and Negative Reversals are basically the opposite of Divergence.

  • Positive Reversal occurs when price makes a higher low while RSI makes a lower low. Price proceeds to rise. Positive Reversals only occur in Bullish Trends.
  • Negative Reversal occurs when price makes a lower high while RSI makes a higher high. Price proceeds to fall. Negative Reversals only occur in Bearish Trends.

Positive and Negative Reversals can be boiled down to cases where price outperformed momentum. And because Positive and Negative Reversals only occur in their specified trends, they can be used as yet another tool for trend confirmation.

This is an interactive chart. Users have the ability to scroll through the embedded chart or click on “Make it Live” to open the full chart in a separate browser window.

SUMMARY

For more than four decades the Relative Strength Index (RSI) has been an extremely valuable tool for almost any serious technical analyst. Wilder’s work with momentum laid the groundwork for future chartists and analysts to dive in deeper to further explore the implications of his RSI modeling and its correlation with underlying price movements. As such, RSI is simply one of the best tools or indicators in a trader’s arsenal of market metrics to develop most any trading methodology. Only the novice will take one look at RSI and assume which direction the market will be heading next based off of one number. Wilder believed that a bullish divergence was a sign that the market would soon be on the rise, while Cardwell believed that such a divergence was merely a slight price correction on the continued road of a downward trend. As with any indicator, a trader should take the time to research and experiment with the indicator before relying on it as a sole source of information for any trading decision. When used in proper its perspective, RSI has proven to be a core indicator and reliable metric of price, velocity and depth of market.

HOW TO USE WITH TRADINGVIEW

  1. Navigate to https://www.tradingview.com/
  2. On the landing page, enter a symbol and click “Launch Chart”
  3. Within the Toolbar along the top of the chart select “Indicators” and choose the one you would like to add to your chart.
  4. To make changes to your Indicator you will need to access the Formatting Window.
  5. You can access the Formatting Window by either clicking on the Blue “Format” button in the Chart Header next to the Indicator name, or by right clicking on the Indicator in the chart itself and selecting “Format”.

INPUTS

Length

The time period to be used in calculating the RSI. 14 days is the default.

Source

Determines what data from each bar will be used in calculations. Close is the default.

STYLE

Can toggle the visibility of the RSI as well as the visibility of a price line showing the actual current price of the RSI. Can also select the RSI’s color, line thickness and line style.

Upper Band

Can toggle the visibility of the Upper Band as well as sets the boundary, on the scale of 1-100, for the Upper Band (70 is the default). the Upper Band’s color, line thickness and line style can also be determined.

Lower Band

Can toggle the visibility of the Lower Band as well as sets the boundary, on the scale of 1-100, for the Lower Band (30 is the default). the Lower Band’s color, line thickness and line style can also be determined.

Background

Toggles the visibility of a Background color within the RSI’s boundaries. Can also change the Color itself as well as the opacity.

Precision

Sets the number of decimal places to be left on the indicator’s value before rounding up. The higher this number, the more decimal points will be on the indicator’s value.

PROPERTIES

Last Value on Price Scale

Toggles the visibility of the Indicator Value on the vertical axis.

Arguments in Header

Toggles the visibility of the indicator’s name and settings in the upper left hand corner of the chart.

Scaling

Scales the indicator to either the Right or to the Left.

How to use the RSI indicator to find entries and exits when trading cryptocurrency

RSI, short for “relative strength index”, is one of the most popular indicators used by traders (margin traders and day traders alike) to find profitable entry and exit prices.

RSI is a momentum-based indicator that compares an asset’s current strength with that of a previous period. Most traders use a period setting of 14, which means closing price data from the past 14 periods (15m, 30m, 1h, 4h, etc) will be used to calculate RSI.

RSI oscillates between 0 and 100. If an asset’s RSI value drops below 30, it is considered oversold, while a RSI higher than 70 indicates overbought conditions.

An asset that is oversold is believed to be trading under its true value, and has a high probability of rebounding to the upside in the otherwise normal market conditions.

Conversely, an overbought asset is one that trades at a premium and has a high probability of correcting to the downside.

On a macro level, RSI is also an indicator of bear and bull market conditions. In a bear market, RSI typically ranges between 10 and 60, with 50-60 acting as a resistance range.

In a bull market, RSI often moves between 40 and 90, with 40-50 acting as a support range.

How to set up RSI on Liquid

RSI is a very useful indicator that has the potential to bring a lot of clarity to seemingly random price movements.

We’ll be taking a look at some charts later on in this post, so let’s quickly go over how to set up the RSI indicator in case you want to follow along on a live chart.

First, head over to Liquid and select a trading pair. We’ll use BTC/USD for this example. Click on the indicators icon to bring up a search box, type RSI, and click on “Relative Strength Index”.

By default, the RSI indicator on Liquid charts display oversold and overbought thresholds of 30 and 70, respectively.

As you gain more trading experience and become familiar with an asset’s volatility tendencies and patterns, you may find it necessary to change these thresholds. For now, the default setting is a good starting point.

A divergence occurs when price action is not adequately supported by trading volume in the same direction, and indicates a high probability price reversal. As a result, price and RSI diverge into opposite directions.

There are two types of RSI divergence – bullish and bearish. A price decrease with RSI increase is a bullish divergence, while a price increase with RSI decrease suggests a bearish divergence.

During bullish divergence exhausted bears are unable to keep the sell volume going, and price reverses to the upside. Bullish divergence is often used as a confirmation signal to buy an asset or open a margin long position.

RSI can be used to determine the macro trend of an asset. In a bear market, RSI tends to fluctuate between 10 and 60, with 50-60 acting as heavy resistance. In a bull market, RSI moves between 40 and 90 with 40-50 acting as strong support. To view these long-term trends on a chart, it’s best to use a weekly or monthly time frame.

Leveraging RSI for Margin Trading

In normal spot trading, it’s only possible to profit on one side of the trade in terms of the denominating currency.

For example, buying 1 BTC at $6500 and selling it $7000 yields a profit of $500. After you sell, it’s not possible to profit off of a subsequent drop in USD terms.

The same logic can be applied to the RSI indicator. When spot trading in a reasonable time frame, it’s possible to profit from buying in oversold regions and selling in overbought regions.

There’s no problem with only playing one side of the trade and it’s a completely valid strategy, but giving yourself exposure to both sides of the playing field could result in more profits or help you recoup after an unprofitable trade.

In order to profit off a bearish divergence in terms of the denominating currency, you’ll need to open a short position which is possible on Liquid through margin trading – borrowing an asset to sell in overbought regions, rebuying the asset in oversold conditions, and returning the loan and pocketing the difference as profits.

RSI is a very powerful tool for finding high probability entries and exits, especially when trading on leverage.

Combining RSI with price action analysis, EMA strategies, and patience can form a strong foundation for further development. Head over to Liquid and experiment with how the RSI indicator can make your margin trading strategy more profitable today.

This content is not financial advice and should not form the basis of any financial investment decisions nor be seen as a recommendation to buy or sell any good or product. Trading cryptocurrency is complex and comes with a high risk of losing money, particularly if you trade on leverage. You should carefully consider whether trading cryptocurrencies is right for you and take the time to learn how trading works and decide how much money you are prepared to lose.

Providing liquidity for the crypto economy.

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