Relative Strength Index (RSI) a tool to measure speed and change of price movements
BY Chris Andreou
|December 23, 2020The Relative Strength Index (RSI) is a momentum indicator and popular with commodities traders. The RSI is used by traders and investors as a principal method for measuring extreme readings (overbought/oversold zones).
The RSI is a leading indicator which precedes price that oscillates in a range between 0 and 100 with three popular methods of use:
- Identifying tops and bottoms
- Spotting chart formations
- Identifying Breakouts
- Support & resistance levels are identified more clearly
RSI Tops-bottoms
A trader using the RSI will look for signals when prices are trading at either extreme highs or lows. The RSI can assist with alerting the trader with long positions for profit taking or opening short new positions when RSI readings are at the extremes above 70 and vice versa for RSI extreme readings below 30.
- RSI tops above 70 alerts for price is near a top
- RSI below 30 alert prices is near a bottom
RSI Tops and bottoms
Buy Signals occur when the RSI falls below 30 and rises back above 30.
RSI chart formations
Since RSI is a leading indicator RSI can be a useful tool for identifying key price patterns such as Heads and shoulders, triangles, as well as trend lines. Formations may be seen on RSI before seen on prices.
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RSI Breakouts
Since RSI is a leading indicator which a trader can use RSI to spot potential price alert breakouts. RSI can be used to spot potential price breakouts via plotting support and resistance levels on the RSI in the same as plotting support and resistance levels on price. RSI can also be a useful tool for identifying trendlines.
Conclusion:
RSI is a leading momentum indicator
- RSI leads price
- Alerts to overbought / oversold levels
- Easy to identify chart patterns and support & resistance levels in front of price charts
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