The Relative Strength Index (RSI) is a momentum indicator used in technical analysis to measure the speed and magnitude of recent price changes of an asset. Developed by J. Welles Wilder Jr. in 1978, it is represented as an oscillator that moves on a scale from 0 to 100.
๐ Interpretation of Key Levels
The RSI is primarily used to identify extreme market conditions:
Overbought: A RSI above 70 suggests that the asset has experienced a rapid increase and may be subject to a correction or pullback.
Oversold: An RSI below 30 indicates that the asset has experienced excessive decline and may be ripe for a rebound.
Neutral Zone: The area between 30 and 70 is considered neutral. Crossing the midpoint line (50) can signal a change in momentum (bullish above, bearish below).
๐ Advanced Trading Signals
Beyond simple boundaries of 70/30, traders monitor specific configurations:
Divergence: Occurs when the price reaches a new high (or low) while the RSI does not. This often signals a weakening of the current trend and a potential reversal.
Support and Resistance Zones: The RSI can itself form trend lines or chart patterns (double tops, etc.) that are not always visible on the price chart.
Standard Setup: The default period used is generally 14 days (or 14 candles), but it can be adjusted according to the trading style (shorter for more sensitivity, longer for fewer false signals).
โ๏ธ Practical Implementation
Most platforms, like the Desjardins Brokerage or Interactive Brokers, integrate the RSI by default. To add it on a tool like TradingView, simply select it from the technical indicators menu.
Caution: The RSI can remain in overbought or oversold territory for long periods during strong trends. It is therefore recommended to use it in conjunction with other tools like moving averages or the MACD to confirm signals.
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