Relative Strength Index (RSI)
What is Relative Strength Index?
RSI is an oscillator indicator that measures the speed of change of price moments. RSI oscillates between 0 to 100. RSI was developed by J. Welles. Wilder. The asset is considered overbought when RSI is above 70 & the asset is considered oversold when the RSI is below 30.
Simply buying the asset when RSI is below 30 or selling when the RSI is above 70 may not be that much helpful. In order to generate a signal from RSI, one must look for divergences in RSI.
Regular Bearish Divergence - In bearish divergence, we will be checking the highs of both the price and the RSI. If the price is making higher highs and the RSI is making lower highs, it is called bearish divergence & is probably followed by a correction in prices.
Hidden Bearish Divergence - If the price is forming lower highs & the RSI is forming higher highs, it is probably followed by a correction in prices and is called Hidden Bearish Divergence.
Regular Bullish Divergence - It is formed when the price is forming lower lows but the RSI is making higher highs, signaling a rise in prices.
Hidden Bullish Divergence - It is formed when the price is forming higher lows & the RSI is forming lower lows, indicating an increase in prices.
Example of Bullish Divergence
As seen above the price was making lower lows but RSI was recording higher lows. This was followed by a massive upside move in the price action.
Example of Bearish Divergence
In the above chart, the price made a high after which it made a higher high but the RSI was recording lower highs. This indicates a correction in the prices.