why is rsi important 
using rsi with trendsthe primary trend of the security is important to know to properly understand rsi readings for example well known market technician constance brown cmt proposed that an oversold reading by the rsi in an uptrend is probably much higher than 30 likewise an overbought reading during a downtrend is much lower than 70 5as you can see in the following chart during a downtrend the rsi peaks near 50 rather than 70 this could be seen by traders as more reliably signaling bearish conditions many investors create a horizontal trendline between the levels of 30 and 70 when a strong trend is in place to better identify the overall trend and extremes 6on the other hand modifying overbought or oversold rsi levels when the price of a stock or asset is in a long term horizontal channel or trading range rather than a strong upward or downward trend is usually unnecessary the relative strength indicator is not as reliable in trending markets as it is in trading ranges in fact most traders understand that the signals given by the rsi in strong upward or downward trends often can be false a related concept focuses on trade signals and techniques that conform to the trend in other words using bullish signals primarily when the price is in a bullish trend and bearish signals primarily when a stock is in a bearish trend may help traders to avoid the false alarms that the rsi can generate in trending markets image by sabrina jiang investopedia 2021overbought or oversoldgenerally when the rsi indicator crosses 30 on the rsi chart it is a bullish sign and when it crosses 70 it is a bearish sign put another way one can interpret that rsi values of 70 or above indicate that a security is becoming overbought or overvalued it may be primed for a trend reversal or corrective price pullback an rsi reading of 30 or below indicates an oversold or undervalued condition 7overbought refers to a security that trades at a price level above its true or intrinsic value that means that it s priced above where it should be according to practitioners of either technical analysis or fundamental analysis traders who see indications that a security is overbought may expect a price correction or trend reversal therefore they may sell the security the same idea applies to a security that technical indicators such as the relative strength index highlight as oversold it can be seen as trading at a lower price than it should traders watching for just such an indication might expect a price correction or trend reversal and buy the security interpretation of rsi and rsi rangesduring trends the rsi readings may fall into a band or range during an uptrend the rsi tends to stay above 30 and should frequently hit 70 during a downtrend it is rare to see the rsi exceed 70 in fact the indicator frequently hits 30 or below 3these guidelines can help traders determine trend strength and spot potential reversals for example if the rsi can t reach 70 on a number of consecutive price swings during an uptrend but then drops below 30 the trend has weakened and could be reversing lower the opposite is true for a downtrend if the downtrend is unable to reach 30 or below and then rallies above 70 that downtrend has weakened and could be reversing to the upside trend lines and moving averages are helpful technical tools to include when using the rsi in this way be sure not to confuse rsi and relative strength the first refers to changes in the the price momentum of one security the second compares the price performance of two or more securities 2example of rsi divergencesan rsi divergence occurs when price moves in the opposite direction of the rsi in other words a chart might display a change in momentum before a corresponding change in price a bullish divergence occurs when the rsi displays an oversold reading followed by a higher low that appears with lower lows in the price this may indicate rising bullish momentum and a break above oversold territory could be used to trigger a new long position a bearish divergence occurs when the rsi creates an overbought reading followed by a lower high that appears with higher highs on the price 8as you can see in the following chart a bullish divergence was identified when the rsi formed higher lows as the price formed lower lows this was a valid signal but divergences can be rare when a stock is in a stable long term trend using flexible oversold or overbought readings will help identify more potential signals image by sabrina jiang investopedia 2021example of positive negative rsi reversalsan additional price rsi relationship that traders look for is positive and negative rsi reversals a positive rsi reversal may take place once the rsi reaches a low that is lower than its previous low at the same time that a security s price reaches a low that is higher than its previous low price traders would consider this formation a bullish sign and a buy signal conversely a negative rsi reversal may take place once the rsi reaches a high that is higher that its previous high at the same time that a security s price reaches a lower high this formation would be a bearish sign and a sell signal 9example of rsi swing rejectionsanother trading technique examines rsi behavior when it is reemerging from overbought or oversold territory this signal is called a bullish swing rejection and has four parts 8as you can see in the following chart the rsi indicator was oversold broke up through 30 and formed the rejection low that triggered the signal when it bounced higher using the rsi in this way is very similar to drawing trend lines on a price chart image by sabrina jiang investopedia 2021there is a bearish version of the swing rejection signal that is a mirror image of the bullish version a bearish swing rejection also has four parts 8the following chart illustrates the bearish swing rejection signal as with most trading techniques this signal will be most reliable when it conforms to the prevailing long term trend bearish signals during downward trends are less likely to generate false alarms image by sabrina jiang investopedia 2021the difference between rsi and macdthe moving average convergence divergence macd is another trend following momentum indicator that shows the relationship between two moving averages of a security s price the macd is calculated by subtracting the 26 period exponential moving average ema from the 12 period ema the result of that calculation is the macd line a nine day ema of the macd called the signal line is then plotted on top of the macd line it can function as a trigger for buy and sell signals 10 traders may buy the security when the macd crosses above its signal line and sell or short the security when the macd crosses below the signal line the rsi was designed to indicate whether a security is overbought or oversold in relation to recent price levels it s calculated using average price gains and losses over a given period of time the default time period is 14 periods with values bounded from 0 to 100 7the macd measures the relationship between two emas while the rsi measures price change momentum in relation to recent price highs and lows these two indicators are often used together to provide analysts with a more complete technical picture of a market these indicators both measure the momentum of an asset however they measure different factors so they sometimes give contradictory indications for example the rsi may show a reading above 70 for a sustained period of time indicating a security is overextended on the buy side at the same time the macd could indicate that buying momentum is still increasing for the security either indicator may signal an upcoming trend change by showing divergence from price the price continues higher while the indicator turns lower or vice versa limitations of the rsithe rsi compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart like most technical indicators its signals are most reliable when they conform to the long term trend true reversal signals are rare and can be difficult to separate from false alarms a false positive for example would be a bullish crossover followed by a sudden decline in a stock a false negative would be a situation where there is a bearish crossover yet the stock suddenly accelerated upward since the indicator displays momentum it can stay overbought or oversold for a long time when an asset has significant momentum in either direction therefore the rsi is most useful in an oscillating market a trading range where the asset price is alternating between bullish and bearish movements 