Intermediate – RELATIVE STRENGTH INDEX (RSI)

Jun 17,2020

Regain Capital

RELATIVE STRENGTH INDEX (RSI)

(A) Introduction

▸A momentum indicator used to
measure the extent of price changes of an instrument.

▸It is mainly used to identify
when an instrument is currently overbought or oversold following an existing trend.

▸Also used to identify potential
trend reversal

▸Displayed as an oscillator
(line graph), scaled from 0 to 100.

1) 70-100 : Indicates an overbought
market

2) 50 : Center-line
for trend reversal confirmation

3) 0-30 : Indicates an
oversold market

(B) Overview

(C) Application Of RSI

▸Investors can use RSI to
determine: potential tops to enter sell positions when the market is overbought ; potential
bottoms to enter buy positions when the market is oversold

▸The concept applies the famous
saying of ‘Buy Low , Sell High’

▸Investors can also look for
trend confirmations by monitoring the 50 center-line.

▸If the RSI breaks above the 50
line from the bottom-up, it indicates an uptrend; breaks below the 50 line from the top-down indicates a
downtrend

(D) RSI Divergence

▸Similar to the MACD, RSI can
also provide divergence signal whereby direction of price action is inverse with the direction of the
oscillator line.

▸Positive
divergence – Price action formed lower low but RSI formed higher low

▸Negative divergence – Price action formed
higher high but RSI formed lower low

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Intermediate – RELATIVE STRENGTH INDEX (RSI)

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