This article has been translated from English to Gen Z Slang.

The RSI or Relative Strength Index is like that squad leader of indicators that shows how strong or weak a currency pair is flexing by comparing its gains vs. losses over time. 💪💹

Basically, it keeps tabs on price happiness and sadness and checks it against the now price.

Our dude J. Welles Wilder Jr. cooked up the RSI back in 1978, dropping it in his bestseller, "New Concepts in Technical Trading Systems."

The RSI is like a momentum guru; it helps peeps figure out the speed and passion behind price moves and whether the force is getting stronger or ghosting. 👻

RSI ain't just about the vibes, it’s also for spotting price hype, whether it's crushing on overbought or broken-hearted in oversold status, plus any sneaky divergence signals.

What is the RSI indicator?

The RSI rolls as an oscillator (think mood swings on a chart) flipping between 0 and 100.

RSI

On a price chart, the RSI is like a solo line crafted from:

  • The average gain during happy times within a set period.
  • The average loss during downer times within a set period.

Dropping the ratio of these vibes gives you a number between 0 and 100 that tells the tale.

  • Readings over 50 say, "Hey, price is diffusing upwards."
  • Readings below 50 mean, "Yo, price is slippin', bro."

RSI above and below 50

“Oversold” vs. “Overbought”

The RSI is tagged “oversold” below 30 and screams “overbought” above 70, splitting into three zones:

  1. 0-30: Oversold (OS) - code red territory 🆘
  2. 30-70: Neutral grounds - chill zone
  3. 70-100: Overbought (OB) - cloud 9 vibes 🌥️

RSI overbought and oversold areas

Uptrend vs. Downtrend

  • In an uptrend or bull run, RSI vibes between 40-90 with the 40-50 range acting as the home base. 🐂
  • In a downtrend or bear plunge, it's vibing in the 10-60 range with 50-60 acting as the mood killer. 🐻

Default Settings

The go-to timing for the RSI is set for 14 periods.

Some peeps like to mix it up, swinging from as low as 2 periods (for weekly flexes) to as high as 25 periods (for quick moves).

How to Trade RSI

RSI is like the Swiss Army knife of traders. You can use it to:

  • Confirm a fresh vibe.
  • Spot when prices might be hitting “overbought” or “oversold” feels.
  • Flag potential price U-turns due to mood swings between actual price and RSI vibes.

So, let’s swirl through ways RSI creates killer trade signals. 🚀

Overbought/Oversold (Trend Reversal)

As price tumbles, RSI gravitates towards 0. If price climbs, RSI is killing it at 100. Extreme zones mean the currency pair is flexin' overbought or undersold. ✨

  • The 70+ zone screams overbought.
  • The sub-30 zone whispers oversold.

An overbought sig hints that the high might chill (just for a hot sec), and dips could follow. 🔥

An oversold sig means the dip party's winding down (briefly) and might spring back up. 🎉

Convergence/Divergence (Trend Strength/Weakness)

  • Convergence: When RSI rolls with the price, it's bull vibes and solid trend powers. 🐮
  • Divergence: When RSI is on a solo ride away from price, it marks weak link energy and dwindling bull swag.

When RSI hits those high or low ends, see it as a warning sign that the trend might just ghost or bounce back. ⚠️

Just 'cause RSI hits the extreme doesn't promise a plot twist; it just teases potential scenario TikToks.

BUY Signals

Oversold signal (Trend Reversal)

Catch a buy signal when RSI chills at the oversold vibe (30 or below) and pops back up over 30.  📈

Uptrend alert (Trend Confirmation)

Score a buy alert when the RSI was in the below 50 gloom and then bounces back above 50. 🌟

Bullish Divergence signal (Trend Reversal)

Go for the buy when a hop of bullish divergence shows up between the price chart and RSI. Basically, it's RSI making higher lows when prices are making lower ones.

SELL Signals

Overbought signal (Trend Reversal)

Spot a sell signal when RSI vibes at overbought levels (70 or more) and dips back below 70.  📉

Downtrend alert (Trend Confirmation)

Land a sell alert when RSI was ghosting above 50 and falls back below 50.

Bearish Divergence signal (Trend Reversal)

Sell when a bearish divergence between price vs. RSI happens. This is when RSI makes a lower high whilst price makes a party on a higher high.

How to Calculate RSI

RSI math can be a workout. It's done by pulling in relative mood feels by comparing average gainz and sadness losses.

Here's how it goes down:

  • Average Gain: Gain is good vibes only in closing prices over time. To get the average gain, stack up all gains and: division party! 🎉 (Total Gain / Period).
  • Average Loss: Loss is like a rain cloud on closing prices. For average loss, slap together all losses and divide by the periods. (Total Losses / Period).
  • Relative Strength (RS): Your RS is the quotient of average gain chilling with average loss (Average Gain / Average Loss).

Let’s break down the RSI sauce using the default 14-period rule:

RSI = (100 – (100 / (1 + RS)))

Here, RS translates to “Relative Strength,” FYI. 🙌

Now produce the Relative Strength (RS) magic:

RS = (14 EMA on the last 14 YOLO bars) / (14 EMA on the last 14 messy bars)

Once RS is cooked, slam that number into the RSI formula to get the current RSI and vibe check the market. 🎢