Thoughts on the RSI.

Rakesh Sethia asks:

“RSI failing to mark higher highs with the price shows that the speed of price rise is slowed down. or is it? the price can move down and thus a valid divergent signal. But if I have to any which ways follow the price, whats the need for an RSI. Its just an indicator of getting cautious.

On second thoughts, if the speed of price rise has slowed down, i.e. momentum has slowed, do I still need to be in the lazy price moving stock or do i exit straightaway? if yes, how long?”

A discussion on the RSI (Relative Strength Index, a technical indicator developed by Welles Wilder in 1978), is useful and interesting.

Rakesh made his remarks following my blog post Indicator Divergences in the Nifty .

When the RSI fails to make higher highs, while price continues to do so, the indication is that momentum has slowed down. Maybe prices were moving up at 3 percent a week, and, now are moving up at 2 percent a week. This suggests deceleration in momentum, which leads to lower highs in the RSI. Now comes the question: So what? If prices are rising at 2 percent a week, does it suggest the onset of a decline? My answer is: certainly not.

Traders can say that a divergence warns hem to be ‘cautious’. How? How do we become cautious? Therefore, a divergence in the RSI does not provide an actionable strategy.

A decline in the speed of price rise does not suggest that the uptrend is over. In fact, quite the opposite. We must understand that prices are still rising. This happens when the trend is strong, therefore, a divergence will often suggest a strongly trending stock. You want to stay with it.