The issue is that markets can stay in those conditions for a long time. The oversold overbought settings are a common approach to the RSI.
If you do decide to tweak the default settings of the Relative Strength Index, try to line up RSI turning points at the 80/20 or 70/30 lines with the turns in the market.Ī longer look back will ease off on the volatility of the RSI where a shorter look back will see more volatility in the indicator.
To aid in that calculation, Wilder suggested a look back period indicator setting of 14 periods be used. The RSI oscillates using a calculation that compares the relative strength of gains in price of days that close above previous days close (up days) to the price loss on days that close below previous days close (down days). It was followed up in a book by Wilder called New Concepts In Technical Trading Systems. Relative Strength Index Formulaġ978 saw an article published in Commodities Magazine by Welles Wilder where the Relative Strength Index was introduced to the public. While these levels can show you the strength of the market, you need other techniques to trade off of them. Traders that blindly take make trading decision at those levels or treat them as trading signals, tend to lose money over time. 70/30 where 70 is overbought and 30 is oversold.80/20 where 80 is an overbought level and 20 is an oversold level.The most common settings that traders tend to watch are: It then plots at value between 0 and 100 making it a bounded indicator. The RSI compares the strength of up days to the strength of down days and with that calculation, we can determine if the momentum taking place is either bullish or bearish (consider lack of momentum as well). Welles Wilder is one of the most popular technical indicators being used.