What is the RSI indicator?
The RSI (Relative Strength Index) is a well established indicator classified as a "momentum based oscillator" which traders use to:
- Measure the speed (velocity) of price movements.
- Measure the change (magnitude) of directional price movements.
Often considered a trader's best friend, the RSI gathers:
- The points won on candlesticks with higher Closes
- The points lost on candlesticks with lower Closes
- The "index" of these two sums
- Plots and displays the results as a single line, bounded between a scale of 0 and 100.
The indicator provides a visual mean to monitor both the current, as well as historical, strength and weakness of a market. RSI has proven to be a reliable indicator of price movements.
The RSI is most well-known for it's ability to recognize market turning points (reversals).
On a Daily timeframe the RSI is the most accurate technical indicator for forecasting reversals, and not much else comes close to it
Compared to the Commodity Channel Index and Stochastic Oscillator, the RSI has more authority and feels stronger for picking tops and bottoms. Whereas the CCI and Stochastic overshoots and is more sensitive to price movement, the RSI maintains composure and only reacts to significant price changes when it really needs to.
On the standard setting of 14 periods, the market will:
- Reverse to the downside when the RSI is above the 70 level.
- Reverse to the upside when the RSI is below the 30 level.
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