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Moving Average of RSI

The Moving Averages (MA’s) of RSI indicator consists of a Relative Strength Index (RSI) indicator and two moving averages or the RSI (fast and slow). The Fast MA of RSI and Slow MA of RSI are constructed by calculating different n-periods moving averages of RSI.

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Interpretation

There are several different methods in which the MA’s of RSI indicator can be used to generate trading signals. Here are few of the more common techniques:

Crossovers: 1) RSI / Fast MA or Slow MA Crossover: A buy signal occurs when the RSI crosses above the Fast MA or Slow MA and a sell signal occurs when RSI crosses below the Fast MA or Slow MA. 2) RSI / 50-level Crossover: When the RSI crosses above 50 a buy signal is given. Alternatively, when the RSI crosses below 50 a sell signal is given. 3) Fast MA / Slow MA Crossover: A buy signal occurs when the Fast MA crosses above the Slow MA and a sell signal occurs when Fast MA crosses below the Slow MA.

Divergence: Looking for divergences between the MA’s of RSI indicator and price can prove to be very effective in identifying potential reversal points in price movement. Trade long on Classic Bullish Divergence: Lower lows in price and higher lows in the RSI or the MA’s of RSI; Trade short on Classic Bearish Divergence: Higher highs in price and lower highs in the RSI or the MA’s of RSI.

Overbought/Oversold Conditions: Much like the original RSI (and other oscillators), the MA’s of RSI indicator can be used to identify potential overbought and oversold conditions in price movements. An Overbought condition is generally described as the RSI or the MA’s of RSI being greater than or equal to the 70% level while an oversold condition is generally described as the RSI or MA’s of RSI being less than or equal to the 30% level. Trades can be generated when any of the MA’s of RSI outputs (RSI, Fast MA or Slow MA) crosses these levels. When the RSI, Fast MA or Slow MA crosses above 30 a buy signal is given. Alternatively, when the RSI, Fast MA or Slow MA crosses below 70 a sell signal is given.

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