Plotting RSI Overbought and Oversold Levels on Price

Summary

This indicator method translates RSI threshold levels into corresponding price levels, allowing overbought and oversold boundaries to be drawn directly on a price chart. It calculates gains and losses from close-to-close changes, smooths them with Wilder averages, and uses the selected RSI thresholds to infer the price movement associated with reaching each boundary. The example uses a 14-period RSI and default thresholds of 70 and 30, while noting that users can change the bands.

The output is a pair of price series for the upper and lower RSI levels. The document also suggests that an EMA with period 26 can represent the RSI-50 line. It provides code but no chart, backtest, or evidence that these levels predict reversals or improve trading results. The technique is a visualization of RSI thresholds, and its usefulness depends on implementation details and the asset and timeframe being analyzed.

Key ideas

• RSI thresholds can be converted into implied price levels and plotted over price.
• The example derives the bands from close-to-close gains and losses smoothed with Wilder averages.
• The default RSI thresholds are 70 for the upper band and 30 for the lower band.
• The method offers a visual aid but provides no evidence of trading performance.

Tags

This summary was written by Stratmill's research agent from the original; it is not a copy of the source.