Some traders find it easy to use the RSI indicator, as it is associated with saturated price patterns and price descriptions that can be seen as low or high limits during a trend. But is it really that easy to use the RSI indicator?
What is the relative strength index?
The relative strength index (RSI) is an analytical indicator that traders use to measure the speed of an asset's price movement.
The RSI indicator is displayed as an oscillator with values ranging from 0 to 100. This indicator was originally developed by J. Welles Wilder Jr. and introduced in his 1978 book, New Concepts in Technical Trading Systems. This indicator is widely used by traders and technical analysts around the world. RSI measures asset price changes over 14 periods (14 days for daily charts, 14 hours for hourly charts, etc.).
Sell signal confirmation is given when the RSI falls from the overbought area and is below 70, while buy confirmation is given when the RSI rises from the oversold area and is above 30. However, it should be noted that not all overbought and oversold signals will end in a long reversal. Often, prices will continue to rise or fall along the prevailing trend.
Although the default setting for the RSI indicator is 14 periods, traders can choose to modify it to increase sensitivity on shorter periods or decrease sensitivity on longer periods. In most cases, the seven-day RSI tends to be more sensitive to price movements than the 21-day RSI.
Regardless of its utility, RSI is most beneficial when used in conjunction with other technical analysis indicators. Usually often paired with the MACD indicator.
Using RSI to determine trends
When using RSI, trading benefits because the indicator detects when the trend will change. The beginning of these changes can be detected by looking for breakouts at key technical levels in the market.
In viewing or determining trends, traders usually use moving averages. However, other technical indicators can also be used as a guide, such as Aroon and Heikin Ashi candles.
RSI has its own way of determining a trend. Pay attention to level 50 and consider it a threshold. If the RSI signal is above 50 then the trend is up, while if it is below 50 then the trend is down.
Apart from being a trend setter, level 50 can also indicate an early sign of a change in trend. This can be marked by a breakthrough of level 50 and is usually called a Centerline Crossover, or a breakthrough of the center line with an RSI signal.
Limitations of RSI
RSI is an indicator that compares bullish and bearish price momentum and displays the results in an oscillator that can be placed below the price chart.
Like most technical indicators, RSI signals are most reliable when adjusted to the long-term trend of an asset's price movements.
However, reversal signals are relatively rare. This makes analysis with RSI difficult because it does not provide precise information. Sometimes, traders or investors are faced with wrong RSI signals, which can lead to fakes, or when traders buy or sell assets at the wrong time due to less precise RSI calculations.
Because the indicator displays momentum, the RSI indicator can also continue to display an overbought or oversold phase for a long period of time. This is another use of RSI: stock market trading in an oscillating market.
That is, when the market faces waves of significant price movements, where asset prices alternate between bullish and bearish movements.
