Hi everyone welcome back to the technical analysis training course.
Today we're going to be talking about the relative strength index.
So let's get right to the relative strength index or the RSI.
The RSI is calculated in the following manner.
Our site equals a 100 minus 100 divided by 1 plus R S and R S is the average gain in n period.
So if we're talking about days that our US is the average gain in days minus the average loss and that
same number of days usually the RSI is calculated on a 14 day period.
You can change this time frame but that is the standard in that we're talking about RSI provides buy
and sell signals when a stock reaches an overbought or oversold condition.
RSI is an oscillator meaning it moves between zero and 100.
And we use it as a trend reversal indicator.
It's best to use RSI with other indicators such as support and resistance because you'll often find
overbought or oversold conditions around support or resistance.
So when RSI rises over 70 we're going to look to sell the stock or at a minimum where a look to tighten
our stops and be ready for the stock to turn down when the RSI is under 30.
We're going to look to buy the stock as the stock is in an oversold condition at that point.
Some traders like to use 80 and 20 as opposed to the 70 and 30 level with RSI.
So if you're a more conservative trader you're going to look to sell a stock or Again tighten your stops
when RSI reaches the 80 level and you're on a look to buy the stock when RSI dives under 20.
We're also going to look for divergences just like we did with the Mac.
So look for both positive and negative divergences.
If the RSI is moving down and the stock is continuing to move up we have a negative divergence and if
RSI is moving up and the stock is moving down then we have a positive divergence.
Let's look at RSI on a chart and see how we would use it in our trading.
Let's use a chart of Tesla to look at the relative strength index.
So here we have Tesla TSL LA which is typed in the upper left portion of our trading view screen.
We're looking at a daily chart and we're going to go to indicators and type in RSI.
We see the relative strength index places the relative strength index at the bottom of the screen and
we can see in mid-June that the RSI gave us an overbought indicator This line represents the 70 level.
The RSI went through 70 and actually went up to around the 78 level.
So this was giving us a sell indicator and we would either sell or tighten our stops if we are long
the stock at this point which had been in an uptrend
and we see the stock after the RSI gave us the sell indicator sold off the stock had been trading.
It went to a high here of 373 73 and then the sell off and went down to a low of 286 13.
So that was a nice move down in the stock with a cell signal provided by the RSI the stock bounced.
Now we've got another cell signal on the RSI here.
When it touch 70 this strong move up in the stock the RSI was telling you that the stock was over ball
at this point.
And again we would either sell our position or tighten our stop at this point.
The stock trended down and we actually get a buy signal in early September.
Here we are cycads is a buy signal as it drops through the 30 level telling us the stock is oversold
at this point and we get a nice rally in the stock from around 260 up to around the 315 level.
So that's the RSI with Tesla.
But let's zoom out a little bit.
And what we'll see is that the RSI if we draw in a couple of trend lines we have support here
around this level we have resistance here
which the stock didn't move through but then came right back through within a day or two.
In each case.
So if we'd used resistance and support along with our RSI indicator that would have given us more confidence
that the trades were correct at this point.
RSI is the oscillator that is best use if you can use with a support and resistance level.
So that's RSI combined with support and resistance and the stock of Tesla.
I'd like to thank you for watching this video on the relative strength index and our next video we're
going to be talking about a couple of reversal indicators a double top and a double bottom.
I look forward to seeing you in the next video.