Relative Strenght Index

The Relative Strength Index,devised by John Welles Wilder, is one of the most widely used technical analysis oscillators by traders, especially those dealing with futures.
It is a momentum indicator, which however manages to overcome some problems present in the momentum, in other oscillators that generate considerable complications in their interpretation, especially when abrupt market movements occur causing a sudden inversion. It is therefore necessary, for a correct and more comprehensible analysis, to minimize these distortions. The Relative Stregth Index, besides solving this problem, presents a constant oscillation band, from 0 to 100, which allows a comparison of the values with some predetermined constant levels.
By presenting a constant excursion band, from 0 to 100, it is possible to identify fixed zones in which the oscillator is in an extreme situation; they will therefore be considered as overbought zones when the oscillator will register values ​​higher than 70, while we will be oversold if it shows values ​​lower than 30. However, it should be noted that the classical doctrine of technical analysis identified these extreme levels at 80 and 20, instead of 70 and 30. The signals generated by this oscillator are similar to those of many others. The midline of the 50 should be considered as the watershed between a bull market and a bearish one. The crossing of the RSI line with this level can be considered a BUY or SELL signal. But much more important and interesting are, however, the bullish or bearish divergences that can be identified in extreme areas. These signals must be monitored very carefully as they can be categorized as very worrying situations; the creator himself considers the divergences the most indicative characteristic of this oscillator. However, it should be remembered that a strong market prematurely generates overbought or oversold signals and this can lead to hasty exits from a still potentially valid trend; in fact, the overbought phases during a bull market can last a long time, like those of oversold during a bear market. A further system to identify input and output signals from the market thanks to this oscillator is through the use of the 30 and 70 lines, which delimit the extreme situations. In the case, for example, of a bearish market that generates a situation of oversold, with the oscillator therefore well below the line of 30, it could be interesting to take up bullish positions once the value has returned above that level. It would be an entry with a reasonable risk margin, but that could prove to be excellent and timely entry in view of a new bullish movement.