Some traders consider it a buy signal if a security’s RSI reading moves below 30. This is based on the idea that the security has been oversold and is therefore poised for a rebound. However, the reliability of this signal will depend in part on the overall context. If the security is caught in a…
The relative strength index (RSI) measures the price momentum of a stock or other security. The basic idea behind the RSI is to measure how quickly traders are bidding the price of the security up or down. The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that…
The RSI compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart. Like most technical indicators, its signals are most reliable when they conform to the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example,…
The moving average convergence divergence (MACD) is another trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD, called the signal line, is then plotted on top…
Another trading technique examines RSI behavior when it is reemerging from overbought or oversold territory. This signal is called a bullish swing rejection and has four parts: As you can see in the following chart, the RSI indicator was oversold, broke up through 30, and formed the rejection low that triggered the signal when it…
An additional price-RSI relationship that traders look for is positive and negative RSI reversals. A positive RSI reversal may take place once the RSI reaches a low that is lower than its previous low at the same time that a security’s price reaches a low that is higher than its previous low price. Traders would…
An RSI divergence occurs when price moves in the opposite direction of the RSI. In other words, a chart might display a change in momentum before a corresponding change in price. A bullish divergence occurs when the RSI displays an oversold reading followed by a higher low that appears with lower lows in the price. This may…
During trends, the RSI readings 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. In fact, the indicator frequently hits 30 or below. These guidelines can help traders determine trend strength…
Generally, when the RSI indicator crosses 30 on the RSI chart, it is a bullish sign and when it crosses 70, it is a bearish sign. Put another way, one can interpret that RSI values of 70 or above indicate that a security is becoming overbought or overvalued. It may be primed for a trend reversal or corrective price pullback. An…
A related concept focuses on trade signals and techniques that conform to the trend. In other words, using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when a stock is in a bearish trend may help traders to avoid the false alarms that the RSI can generate in trending markets.
