What is RSI 50 level?
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RSI demystified: part 1 part 2 The idea to write an article on Relative Strength Index was born long ago. To show what it really is, what it isn’t and what are the strengths and weaknesses of using it. Most of the insights were meant to be described and shared. And they are. But to a surprise, some new and unexpected discoveries also occurred in the process. One thing is sure – what you are about to read was never published before, and I never even stumbled on any similar ideas. Hopefully, you will equally enjoy reading it as I enjoyed writing it. Sometimes RSI(14) is well above the 50 point level, sometimes it is well below it, and sometimes it crosses it frequently. If we create a simple strategy that holds long position (1) when RSI(14) > 50 and short position (-1) when RSI(14) < 50 than we will get: Now, it gets interesting... Zooming in the period of choppy market when RSI(14) crossed the 50 point line frequently, and comparing it with how price behaved in relation to 27-period exponential moving average (RSI is calculated using Wilder Moving Average (more here), so the TRUE period for exponential moving average smoothing is 2*14 – 1 = 27 bars), we can see that the RSI above/below 50-points signals take place at the same time as the crossovers of price and exponential moving average.
Is this coincidence? How close is the 50-point line to the exponential moving average of the corresponding period length? Can we calculate the difference? Can we calculate the 50-point level in terms of price value… ?
Wow! They both look the same... The only difference is the 1-bar offset between RSI Predictor and Exponential Moving Average, which means that RSI 50-point level IS the exponential moving average! So, any other number that RSI shows has to be interpreted as a distance from it. |