Let’s talk about the RSI, also known as Relative Strength Indicator. The RSI indicator was developed by J. Welles Wilder, it is known as a momentum oscillator that measures both the speed and change of price movements. This RSI ranges between 0 and 100. The RSI can also be used to indicate overbought and oversold conditions in the market. The RSI is considered to be overbought when it is above 70 and it is considered to be oversold when it is below 30. RSI can be used for signalling by looking at divergences, but is can also be used to indicate swing failures. Furthermore the RSI can be used to indicate the general trend of the market.
As stated in the description, RSI can be used to spot overbought and oversold conditions in a market. The RSI is considered to be overbought when it is above 70, and it is considered oversold when it is below the 30 level. Let’s look at some example charts signalling overbought and oversold conditions.
Here is a chart of Bitcoin (BTC) showing overbought and oversold regions and their price reactions:
Here is another example, showing the price reaction of Cardano (ADA) to RSI overbought and oversold conditions:
Please be aware that RSI also gives false signals, always use RSI in confluence with other indicators.
Divergence on the RSI means that the price moves in the opposite direction of the RSI oscillator. Divergence can be used as a warning sign that the price trend may be getting weaker or stronger. There are two main types of RSI divergences:
Within the divergences we have both regular and hidden divergence. Regular is more obvious to spot, hidden divergence might be a bit more complex. For your convenience we have created a divergence cheat sheet showing you all the possible divergences:
Here are four examples showing the types of divergence:
Regular bearish divergence example on LTCUSD:
Here is an example of hidden bearish divergence, shown on the BCHABCBTC chart:
Here is a beautiful example of regular bullish divergence on the BTCUSD pair. Note the price reaction:
There is not a lot you can configure on the RSI indicator. You can configure the period and the levels (conditions). There are two option tabs on TradingView:
You can specify the ‘Length’ of the RSI indicator, which is the number of days RSI looks back. The source is either based on the candle open or close (default).
On the style tab you can configure the following settings:
The most significant settings are the ‘Upper’ and ‘Lower’ band. The settings specify the levels/ conditions that we talked about earlier.