Relative Strength Index (RSI): Buy and Sell Signals Guide

The Relative Strength Index (RSI) is a cornerstone of technical analysis, helping traders gauge momentum, identify trends, and spot potential reversals. This guide dives deep into RSI’s functions—from generating buy/sell signals to detecting divergences—and how to integrate it into your trading strategy.

Key Functions of RSI

1. Buy/Sell Signals:

   • Crosses above/below key thresholds (30/70) indicate potential entry/exit points.

2. Overbought/Oversold Conditions:

   • Highlights extreme price movements ripe for reversals.

3. Trend Confirmation:

   • Aligns RSI movements with price action to validate trends.

4. Divergence Warnings:

   • Flags discrepancies between price and RSI, signaling potential reversals.

👉 Master RSI trading strategies with real-world chart examples.

How to Spot Buy and Sell Signals

Buy Signals

• Condition: RSI crosses above 30 (oversold).
• Example: Gold’s 6 successful buy points on a 14-day RSI chart.

Sell Signals

• Condition: RSI crosses below 70 (overbought).
• Timeframe Impact: Shorter periods (e.g., 5-day RSI) increase signal frequency but raise volatility.

Gold’s RSI signals with 14-day vs. 5-day settings.

Alternative Signal Method

• Buy: Price + RSI rising + RSI > 50.
• Sell: Price + RSI falling + RSI < 50.
• Illustrated in Walmart (WMT) chart.

RSI Divergences: Early Reversal Alerts

Bullish Divergence

• Price: Lower lows.
• RSI: Higher lows → Potential uptrend.

Bearish Divergence

• Price: Higher highs.
• RSI: Lower highs → Potential downtrend.

Example: Nasdaq 100 Futures showed:

1. Confirmed uptrend (RSI + price rising).
2. Bullish divergence at Low #3/#4 (RSI flat despite lower prices).
3. Bearish divergence at High #1/#2 (RSI declined as price peaked).

FAQs

1. What is RSI’s primary use?

• Measures price strength, spots overbought/oversold conditions, and identifies divergences.

2. Who invented RSI?

• J. Welles Wilder (1978) in New Concepts in Technical Trading Systems.

3. How to calculate RSI in Excel?

• Formula:

  RSI = 100 - (100 / (1 + RS))  
  RS = Avg Gain / Avg Loss (over N periods)  

4. What’s a stock’s relative strength?

• Indicates trend strength; high RSI = strong uptrend, low RSI = strong downtrend.

👉 Explore advanced RSI techniques for higher accuracy.

Further Reading

• Stochastic RSI
• Simple Moving Averages
• Swing Index Trading

Pro Tip: Combine RSI with support/resistance levels for robust signals. Always backtest strategies!

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