Relative Strength Index

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RSI (Relative Strength Index)

Momentum oscillator that measures the speed and change of price movements, helping traders identify overbought, oversold, and reversal conditions

Technical Overview

The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. that measures the speed and magnitude of recent price changes. RSI oscillates between 0 and 100, providing a normalized value that helps traders identify overbought, oversold, and reversal conditions.

Key Insight: RSI values above 70 typically indicate overbought conditions, while values below 30 suggest oversold conditions. RSI is widely used to spot potential reversal points, confirm trend strength, and filter out false signals in both trending and ranging markets.

How RSI Works

What RSI Actually Measures

Think of RSI as a “momentum thermometer” that answers: “Is the market overbought, oversold, or balanced?”

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Step 1: Measure Gains & Losses

RSI looks at average price gains and losses over the last 14 periods

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Step 2: Calculate Relative Strength

It compares the magnitude of recent gains to recent losses

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Step 3: Output RSI Value

Outputs a value from 0-100 showing momentum and overbought/oversold status

Reading RSI Values

RSI = 25
Oversold
Market may be due for a bounce or reversal upward
RSI = 50
Neutral
Balanced momentum, no strong trend
RSI = 80
Overbought
Market may be overextended, possible reversal or pullback

Key RSI Components

Average Gain

The mean of all positive price changes over the lookback period (usually 14 days), used to measure upward momentum.

Average Loss

The mean of all negative price changes over the lookback period, used to measure downward momentum.

Relative Strength (RS)

The ratio of average gain to average loss, forming the core of the RSI calculation.

RSI Line

The final oscillator value, ranging from 0 to 100, that signals overbought, oversold, or neutral market conditions.

Strategy Integration

MCTM
5-Day Predictions

How RSI Data Powers Machine Learning:

  • Feature Input: RSI values are used as features for the RandomForest model alongside ADX, MACD, and others
  • Overbought/Oversold Detection: Model learns to recognize reversal zones and momentum extremes
  • Divergence Analysis: RSI divergences help the model spot early trend changes
  • Breakout Confirmation: RSI confirms the strength of price breakouts
  • Noise Filtering: Neutral RSI helps the model avoid choppy, directionless markets

Real Impact: RSI helps the model time entries and exits based on momentum shifts and reversal signals

MFMM
1-Year Predictions

How RSI Enhances Long-Term Forecasting:

  • Cycle Analysis: Model uses RSI to identify major market cycles and regime shifts
  • Persistence Modeling: Extended RSI extremes help spot long-lasting bull/bear phases
  • Volatility Context: RSI trends help predict periods of high/low volatility
  • Sector Rotation: Model learns when strong RSI favors growth vs defensive sectors
  • Macro Confirmation: RSI combined with economic indicators improves macro trend calls

Real Impact: RSI helps the long-term model time major allocation changes and sector rotations

RSI Level Interpretation

RSI < 30 Oversold conditions
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Oversold Territory: RSI below 30 indicates that the asset may be oversold and due for a potential bounce or reversal. This level suggests that selling pressure has been excessive and the market may be primed for a corrective move upward. However, in strong downtrends, RSI can remain oversold for extended periods.
RSI 30-70 Neutral momentum zone
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Neutral Momentum: RSI between 30-70 represents balanced market conditions with no extreme overbought or oversold readings. This range is typical during sideways markets or when price is moving in a controlled manner. RSI in this zone suggests the market is in equilibrium with no strong momentum bias.
RSI > 70 Overbought conditions
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Overbought Territory: RSI above 70 suggests that the asset may be overbought and potentially due for a pullback or reversal. This indicates that buying pressure has been excessive and the market may be overextended. However, in strong uptrends, RSI can remain overbought for extended periods.
RSI Divergence Price/RSI disagreement
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Momentum Divergence: When price makes new highs while RSI makes lower highs (bearish divergence) or price makes new lows while RSI makes higher lows (bullish divergence), it signals potential trend reversal. Divergences are among the most powerful RSI signals and often precede significant price movements.
RSI Centerline (50) Momentum equilibrium
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Momentum Equilibrium: RSI crossing above or below the 50 level can signal shifts in momentum. Crosses above 50 often indicate bullish momentum, while crosses below 50 suggest bearish momentum. The centerline serves as a dynamic support/resistance level for RSI itself.

Why Use RSI in Trading?

  • Overbought and oversold condition identification
  • Momentum divergence detection for trend reversal signals
  • Entry and exit timing optimization
  • Risk management through extreme level awareness
  • Confirmation of price breakouts and reversals
  • Market regime identification for strategy selection

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All indicators and strategies are for learning and simulation. No financial advice provided. Market data refreshes on app reload. Past performance does not guarantee future results.