Indicator update: Customising RSI levels
On the back of client feedback we now offer the possibility to customise the RSI levels on desktop and mobile devices. To do so, click on the RSI label once you have enable the indicator on your chart. This will open a dialog box that will allow you to change the levels (which are set at the default levels of 30/70), as well as customise the period and the colour of the lines.
What is RSI?
The Relative Strength Index is a momentum indicator that measures the magnitude of recent price changes to evaluate whether a stock is oversold or overbought. This indicator can oscillate between 0 and 100 and usually uses the level of 30 to indicate that a stock is oversold and the level of 70 to indicate that a stock is overbought.
The RSI indicator uses the average percentage gains and losses of a specific period which is usually the last 14 days. When a candle closes after a positive move (a green candle stick) the RSI value will increase, whilst after a negative move (a red candle stick) it will fall as the number. The RSI value will be 0 if stocks fall on all 14 days and 100 if the price moves up on all the days.
Like the price, the RSI creates highs and lows that can be connected to create resistance and support levels. In the same way as price action, these support and resistance levels can also be tested, broken and retested.
How RSI is used as a forward-looking indicator
These support and resistance levels can be broken on the RSI chart before they are broken on the price chart, which can create an opportunity to profit on a reversal before it takes place on the price. As with all indicators this is never a guarantee, however it does provide a qualitative supportive argument for possible price action.
Let’s look at the Eurodollar 1-hour chart as an example of this resistance break:
We can see that both the price and the RSI are testing a resistance level, but the breakthrough happens one candlestick before on the RSI chart than it does in the price chart. In this case, the RSI is a leading signal that offers possibility to enter the market at a more favourable price an hour before the actual price level breaks through the resistance level.
Why would you adjust the RSI levels?
For the RSI to be most effective, it has to be adjusted for the inherent volatility of a specific stock or market. In a very volatile environment the RSI is likely to hit the overbought and oversold levels with more frequency, weakening the reliability of the RSI as a leading indicator. When you widen the resistance and support levels you will probably have fewer trends, but they will possibly be better signals.
As can be seen on the FTSE100 15-minute graphs below, the RSI tests the 30-support level various times, but it is not until it tests the 20-support level that the price trends actually reverses.
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