RSI Divergence, Failure Swings, and Common Chart Signals
Summary
The document outlines several ways traders interpret the Relative Strength Index (RSI). It describes typical overbought and oversold regions, chart formations that may appear in the indicator, support and resistance levels, and divergence between price and RSI. In the example discussed, price makes a new high while RSI does not exceed its earlier peak, which the text treats as a possible warning of reversal.
It also explains a failure swing as a further confirmation: after the divergence, RSI turns down and falls below its recent trough. The document gives the RSI calculation in terms of average positive and negative price changes, but does not specify a lookback period or present tests of these signals. Its statements that RSI patterns can precede price turns are descriptive generalizations, not evidence that a reversal will occur in a particular market. Traders would need to define rules and assess them on relevant data before relying on these interpretations.
Key ideas
- RSI divergence occurs when price makes a new extreme that the indicator does not confirm.
- A failure swing can provide an additional reversal confirmation when RSI breaks its recent trough or peak.
- The document lists threshold regions, chart patterns, and support or resistance as other ways to read RSI.
- RSI is calculated from average positive and negative price changes, though the lookback is not specified.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.