The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Conditions are considered overbought above 70, and oversold under 30.
A common mistake I hear often is a strategy to sell above RSI 70 and buy below RSI 30. Utilizing these conditions can be useful but the RSI is much more reliable in a ranging market. In a trending market, it can send misleading signals. It is a tool to measure the momentum of a trend and identify when it breaks or pulls back. Using the above 70 and below 30 as a buy/sell system is not accurate.
Things to know
- When the RSI breaks above 70 in a break out, the bullish trend can definitely continue. Look for a pull back and retest of support.
- When the RSI breaks below 30 in a bearish break, the trend can definitely continue as well. Look for a bounce and retest of resistance.
An excellent way to utilize the RSI is to look for divergence. When the RSI trend slopes opposite to that of the price chart trend, a divergence occurs. If the RSI is in overbought or oversold conditions, expect to see a trend reversal. Here is a cheat sheet for you to use at any time.
Facebook Analysis with RSI
Above weighted moving averages, not over bought, steady series of higher highs and higher lows. A break below the last higher low on both price and RSI would give us an exit signal if we are long.