An alternative way that the Relative Strength Index (RSI) may give buy and sell signals is given below:
An example of this potential methodology for buying and selling based on 50 Line crosses is given below in the chart of Wal-Mart (WMT):
Another usage for the Relative Strength Index is to attempt to confirm price moves and attempt to forewarn of potential price reversals through RSI Divergences.
The chart below of the E-mini Nasdaq 100 Futures contract shows the RSI confirming price action and warning of future price reversals:
The E-mini Nasdaq 100 Futures contract’s price made a substantial move from Low #1 to Low #2. The RSI confirmed this move, which may have helped a trader have confidence jumping on board the price move higher.
The break of trendline of the e-mini future was also confirmed by the trendline break of the Relative Strength Index, suggesting that the price move may likely be over.
A bullish divergence was registered between Low #3 and Low #4. The e-mini Nasdaq 100 future made lower lows, but the RSI failed to confirm this price move, only making equal lows. A trader might see this RSI divergence and begin taking profits from their shortsells.
A bearish divergence occured when the e-mini futures contract made a higher high and the RSI made a lower high. This bearish divergence suggested that prices could be reversing trend shortly. A trader might consider reducing their long position, or even completely selling out of their long position.