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What is the relative strength index indicator?
The relative strength index (RSI) indicator is one of the most popular tools for new traders, with the momentum indicator finding prominence amongst both novice and advanced traders, since its developments by J Welles Wilder.
Part of its attraction is the simplicity of it, with the overbought/oversold parameters providing clear buy and sell signals. However, there are a number of techniques traders can utilise, in a bid to make the tool more profitable.
Strategies for trading with the relative strength index
The standard method for using the RSI is similar to many of the other range-bound momentum indicators, utilising overbought and oversold conditions. Traders will typically see a market as being overbought above 70, yet oversold below 30. That being said, there are a great deal of idiosyncrasies associated with using this tool.
A range-bound market may utilise the traditional overbought/oversold levels perfectly well, given the neutral tone of the market. However, it makes sense that a downtrend would stay in oversold territory for longer, while it may never hit the overbought reading of 70. With that in mind, it makes sense to look for new levels as thresholds in different scenarios.
On the example below, it is clear that the upwardly trending market is driving a number of overbought conditions, yet few oversold ones. Firstly, it is worth noting that the sell signals provided by an overbought reading are typically more powerful when seeing the RSI fall back below 70 (green dashed lines), rather than their initial break into overbought (red dashed lines).