RSI — relative strength index.

What is RSI?

The RSI indicator was developed in 1978 by J. Welles Wilder, it works as an escalator (a line graph that moves between two extremes).
The RSI measures the power of average between profit and between average loss, over a given period of time — Wilder recommends a period of 14 days.
The RSI also moves between a scale of zero that is the weakest and the lowest, two 100 that is the strongest level, when the line is at 50, it is the equal point.

How to understand RSI?

In order to use it in trading we need to understand a few simple rules.
RSI 70 > shows strength of buying volume and gets over to the overbought territory.
RSI 30< shows weakness of buying volume and gets over to the oversold territory.
Most people will see RSI over 30 as a bull signal, and the drop below 70 consider as a bear signal.

As a traitor I like to draw a trend line over the RSI as we do in Japanese candles, it helps to see breakouts in the strength of buying volume, as well as breakdowns (supports).

Important rules for RSI

⁃ If we see an increase in the RSI towards 70 and above — when the move started below RSI 50 it’s most likely to see a continuation to the upside.
⁃ If we see a decrease in the Rsi towards 30 and below — when the move started above RSI 50, it’s most likely to see a continuation to the downside.

The purpose of the momentum is to measure the speed of the price, also the measures of the momentum that contains a long line of different tools such as MACD and stochastic RSI. Each indicator have different qualities but in general the interpretations are completely identical. In order to identify a reversal in the trend we need to use a few different momentum measures and tools. It’s not recommended to trade only by RSI signals.

Diversions

We can use the RSI indicator in many ways, but one of the most powerful signals we can get on the RSI will be diversions.

Bearish Example

If we spot lower high on RSI and in price action we see higher highs — we can understand that the strength of the buying volume is getting lower, and that will create a bearish diversion that eventually would lead to a drop in the price.

Bullish Example

If we spot higher lows on RSI and in price action we see lower lows- we can understand the strength of buying volume is getting higher, and that will create a bullish diversion that eventually would lead to an increase in the price.

We also have Hidden diversions — they are very powerful and not easy to spot by an every day trader, but I really recommend to memorize them and always look out for them.

Hidden bearish diversion

If we spot in RSI a higher high and in price action a lower high we get the hidden bearish diversion.

Hidden bullish diversion

If we spot lower high on RSI, and in price action a higher low we get the hidden bullish diversion.

It’s recommended to spot the diversions because they are a very strong signal to open a trade, it’s best to wait for a confirmation and to get another confirmation and other tools before opening a position.

As a trader I always look for diversions, and with more confirmations there is a 90% chance of success in the trade.

I hope this article about the RSI will be useful for you to gain more profits in your positions.