Reading RSI Signals

Overview

• The Relative Strength Index is straight-forward to interpret, and produces very clear trade signals.
• The RSI scale has two defined regions - the first one starts at 0 and goes to 30, while the second region covers the scale from 70 to 100.
• According to Wilder, an RSI value falling within the 0 to 30 region is considered oversold. Traders assume that an oversold currency pair is an indication that the falling market trend is likely to reverse (i.e. a bullish signal) and is treated as a buy opportunity.

Relative Strength Index showing oversold condition

• On the other hand, an RSI value falling into the 70 - 100 region of the scale, is regarded as being overbought.
• This signal suggests that the resistance level for the currency pair is near or has been reached and the rate is likely to fall; traders would interpret this as a sell (i.e. a bearish signal) opportunity.

Relative Strength Index showing overbought condition

Centerline Crossovers

• In addition to the overbought and oversold indicators described above, technical traders using the Relative Strength Index also look for what is known as a centerline crossover.
• A rising centerline crossover occurs when the RSI value crosses over the 50 line on the scale, moving towards the 70 line.
• A falling centerline crossover occurs when the RSI value crosses under the 50 line towards the 30 line.

Relative Strength Index showing Centerline Crossovers

A rising centerline crossover indicates increasing strength in the market trend and is seen as a bullish signal until the RSI approaches the 70 line (i.e. the overbought region). A falling centerline crossover is an indication of weakening strength and so long as the value does not drop below 30 into the oversold region of the scale, is considered a bearish signal.

Putting It All Together

Lesson 3 Topics