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What is RSI (Relative Strength Index)? Calculation Method and How to Use It Explained Thoroughly
Table of Contents
3-1. Measuring Overbought/Oversold Conditions
5. Precautions and Limitations
5-2. Usage in Trending Markets
6. Combining with Other Indicators
6-1. Combination with Bollinger Bands
1. Overview
RSI (Relative Strength Index) is an oscillator-type indicator that quantifies the strength of price movements over a certain period and measures market overbought/oversold conditions. It was developed by J. Welles Wilder in 1978. RSI values range from 0 to 100, with readings above 70 considered "overbought" and below 30 considered "oversold".
2. RSI Calculation Method
RSI is calculated using the following formula:
RSI = 100 - (100 / (1 + RS))
RS = (Average of upward price changes over the period) / (Average of downward price changes over the period)
Typically, a period of 14 (e.g., 14 days, 14 hours) is used.
3. How to Use RSI
3-1. Measuring Overbought/Oversold Conditions
- RSI above 70 indicates an "overbought" condition, suggesting a potential price reversal.
- RSI below 30 indicates an "oversold" condition, suggesting a potential upward turn.
3-2. Checking for Divergence
Bullish Divergence
- Price is falling but RSI is rising → Sign of buying pressure.
Bearish Divergence
- Price is rising but RSI is falling → Sign of selling pressure.
3-3. Trend Confirmation
- If RSI is above 50, an uptrend is likely continuing.
- If RSI is below 50, a downtrend is likely continuing.
4. Practical Examples
- Buy Signal: When RSI reaches below 30 and starts to turn upward, it suggests the start of an uptrend.
- Sell Signal: When RSI reaches above 70 and starts to turn downward, it suggests the start of a downtrend.
5. Precautions and Limitations
5-1. False Signals
- It's important not to make decisions based solely on RSI entering "overbought" or "oversold" zones, as trends can sometimes continue.
5-2. Usage in Trending Markets
- In strong trending markets, RSI can remain in extreme zones (above 70 or below 30) for extended periods, so it should be used in conjunction with additional indicators.
6. Combining with Other Indicators
6-1. Combination with Bollinger Bands
By combining RSI and Bollinger Bands, you can check overbought/oversold conditions and volatility simultaneously.
6-2. Combination with Moving Averages (MA)
Use RSI together with moving averages to clarify the trend direction and pinpoint entry timings.
7. Summary
RSI is a convenient indicator that can easily measure price overbought/oversold conditions and the strength of trends. It is used by a wide range of traders, from beginners to advanced, and can further enhance trading accuracy when combined with other indicators. However, to prevent false signals, it is recommended to combine multiple analysis techniques rather than using it alone.
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- [Technical Analysis Explained] What are Bollinger Bands? How to Interpret, Set Up, and Use Them
- [Technical Analysis Explained] What is MACD? How to Interpret, Use, and Identify Divergence
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