Traders and technical indicators use many trading strategy and technical indicators to trade efficiently and accurately. These technical indicators are easily adaptable and easy to deploy. Relative Strength Index is one of the most widely used eminent technical indicators. The relative strength index is a technical index used in the study of a financial market or stock markets.
The traders keep RSI indicator in the category of momentum oscillator, which measures the speed and the direction of the price movements. Here, the momentum of the price implies the rate of rising and fall in the price of the assets. The RSI calculates the percentage of the higher closes to the lower closes. The stocks having the stronger positive changes have the higher value of RSI as compare to the stocks having the stronger negative changes.
Usually, the RSI is implemented on a timeframe of 14-days. However, traders manipulate the time and use RSI for any timeframe. RSI is the most commonly used technical indicator for analyzing the stock all over the world. RSI is calculated on the scale from zero to 100, where the point 70 is marked to be high level and the point 30 is marked to a low level.
Technical analysts consider the levels of 80 and 20 as extremely high levels and low levels correspondingly and 90 and 10 are the less occurred levels, which show the stronger momentum and with the help of which they generate accurate intraday cash tips.
According to Wilder, the bullish divergence occurs when the price of a stock makes lower low and the RSI makes a higher low. The divergence indicates the possible reversal point in the chart. If RSI does not show the new low then this is considered as strongest momentum. The bearish divergence occurs when the price of a stock makes higher high and the RSI makes lower high. If RSI does not show the new high then this is considered as weakening momentum.