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RSI Basics

Overbought and Oversold Levels

The most basic RSI application is to use the indicator to identify areas that are potentially overbought or oversold. Movements above 70 indicate overbought conditions. Conversely, movements under 30 reflect oversold conditions. The 50 level represents a neutral market

In terms of market analysis and trading signals, RSI moving above the horizontal 30 reference level is viewed as a bullish indicator, while the RSI moving below the horizontal 70 reference level is seen to be a bearish indicator. Since some assets are more volatile and move quicker than others, 80 and 20 are also frequently used overbought and oversold levels. 

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Overbought Or Oversold? Using The RSI To Find Out

Chart showing RSI oversold condition in uptrend

 

Price/Oscillator Divergence

Chart showing RSI diverging with price

 

Failure Swings

Chart showing an RSI failure swing top and bottom
Chart showing RSI failure swing buy signal

 

RSI Ranges

During an uptrend, RSI tends to stay between different levels than during a downtrend. This makes sense, because the RSI is measuring gains versus losses. In an uptrend, there will be more gains, keeping the RSI at higher levels. In a downtrend, the RSI will tend to stay at lower levels.

During an uptrend, the RSI tends to stay above 30 and should hit 70 often. During a downtrend, it is rare to see the RSI above 70, and the indicator frequently hits 30 or below. These guidelines can aid in determining trend strength and spotting potential reversals. For example, if the RSI isn't able to reach 70 on a number of price swings in a row during an uptrend, and then drops below 30, the trend has weakened and could be reversing lower. 

The reverse is true for a downtrend. If the downtrend is unable to reach 30 or below, and then rallies above 70, that downtrend has weakened and could be reversing to the upside.

RSI trend levels showing reversal

 

RSI Trendline Breaks

Chart showing RSI trendline break

The Bottom Line

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