ZF RSI PLOT

1. How RSI Is Calculated

RSI is typically computed over 14 periods (days, hours, etc.) using the formula:
RSI=100−1001+RS
RSI=100−1+RS100​

where
RS=Average Gain over N periodsAverage Loss over N periods
RS=Average Loss over N periodsAverage Gain over N periods​
2. Overbought (> 70)

Definition: An RSI reading above 70 suggests that the instrument has experienced relatively large gains and may be “overbought.”

Interpretation:

Potential Reversal: Prices may have risen too far, too fast, and could be due for a pullback or consolidation.

Exit/Take Profits: Traders often trim long positions or tighten stops as RSI climbs above 70.

Confirmation Needed:

Bearish “RSI divergence” (price makes a higher high while RSI makes a lower high).

Price action signals (e.g., bearish candlestick patterns).

Volume drying up on advances.

3. Oversold (< 30)

Definition: An RSI reading below 30 suggests that the instrument has experienced relatively large losses and may be “oversold.”

Interpretation:

Potential Bounce: Prices may have fallen too far, too fast, and could be due for a rebound or consolidation.

Buying Opportunity: Traders often look to initiate or add to long positions as RSI drops below 30.

Confirmation Needed:

Bullish “RSI divergence” (price makes a lower low while RSI makes a higher low).

Price action signals (e.g., hammer candlesticks, support levels).

Volume picking up on declines.

4. Divergences

Bullish Divergence: Price ↓ makes a lower low, RSI ↑ makes a higher low ⇒ possible trend change to the upside.

Bearish Divergence: Price ↑ makes a higher high, RSI ↓ makes a lower high ⇒ possible trend change to the downside.

5. Adjustments & Variations

Stronger Trends: Use 80/20 thresholds to avoid early signals in very strong up- or down-trends.

Shorter/Longer Periods: Adjust the look-back period (e.g., 9 for more sensitivity, 21 for smoother signals) depending on your time frame.

6. Limitations & Best Practices

Can Stay Extreme: In strong trends, RSI may remain overbought/oversold for extended periods—don’t trade it in isolation.

Combine with Other Tools: Use trend filters (moving averages, ADX), support/resistance, and volume to confirm entries.

Risk Management: Always set stops and manage position size; RSI signals can fail.

7. Putting It All Together

Identify Trend: Is the market in an uptrend, downtrend, or range?

Watch RSI Extremes: Note when RSI crosses above 70 or below 30.

Seek Confirmation: Look for divergences, candlestick/pricing signals, and supporting volume.

Execute & Manage: Enter with clear stop-loss levels, consider scaling, and lock in profits appropriately.

By understanding both the raw threshold signals and the nuances—like divergences and trend-context—you can harness RSI’s simplicity while mitigating its pitfalls.