Relative Strength Index
RSI is no way a different one when compared with other oscillators in look and feel except in its application and calculation. Average loss and average gain are taken into consideration for calculation of RSI. General setting of RSI is 14 periods. If RSI moves below 30, it is treated as bearish trend and if it is above 70, it is considered as bullish phase.
Like MACD, RSI too explains 3 strategies to predict the trend of the future market.
If RSI is in 50-70 region, one can assume that as a bullish trend and if RSI roams around 30-50 region, probably it can be said as a bearish trend.
If RSI dances at the overbought zone touching 70 several times without coming to its lower region, the bullish trend is said to be formed whereas in bearish phase, RSI touches 30 repeatedly without daring to come up.
Just as explained in our previous article MACD, if the stock closing price makes higher highs and RSI makes lower highs, a trend reversal may take place and a bearish period may come. When prices show lower lows and RSI shows higher low, probably markets may look at bullish side.
This is the area where RSI stands different with other indicators. Failure swings in the market can be predicted using RSI where market reversals are said to take place.
In divergence, we have taken both stock price as well as RSI direction and predicted the market movement whereas in failure swings, we take only RSI oscillator and finds the future movement. Failure swings are classified as Bullish failure swing and Bearish failure swing.
Bullish failure swing takes place in 4 stages. When RSI moves below 30, bounces back a little, again pulls back to 30 and breaks the previously made high, we call that as bullish failure swing and markets are estimated to move up strongly. Point to remember, second low made around 30 should be above the previously made low (higher low should be formed).
As well, if RSI Moves above 70, pulls back, again rises to 70 and finally breaks the previously made low, a bearish phase is said to be taking place shortly with a trend reversal. Here, Second high around 70 should be below the previously made high (Lower high).