Do you want to make smarter trading decisions? If so, you need to learn about Relative Strength Index (RSI). RSI is a technical indicator that measures the strength of a security’s recent price movements. It can be used to help you determine when a security is overbought or oversold.
Let’s have a closer look at it!
Table of contents
- What is Relative Strength Index (RSI)?
- How to calculate RSI
- How to use RSI to make smart trading decisions
- The benefits of using RSI
What is Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is an indicator that measures the magnitude of price changes to evaluate overbought or oversold conditions for a stock or other asset. The RSI is displayed as an oscillator and graphed in the range of 0-100. Values of 70 or above indicate that a security is becoming overbought or overvalued and may follow a trend reversal or corrective variation in price. An RSI of 30 or below indicates an oversold or undervalued conditions.
Developed over 40 years ago, the RSI remains one of traders’ and investors’ most popular technical indicators today. There are different ways to interpret and use the RSI, and it can be applied to any time frame, making it a versatile tool for evaluating short-term, intermediate-term, and long-term price trends.
How to calculate RSI
The indicator is calculated using the following formula: RS = Average Gain / Average Loss. The resulting RS value is then plotted as an oscillator that fluctuates between 0 and 100. A common method of interpreting the RSI is to look for overbought conditions above 70 and oversold conditions below 30. Welles Wilder originally established these levels based on historical market data and his personal observations.
However, other analysts have since suggested alternative ways of interpreting RSI readings above or below these values. Some technicians believe that bullish or bearish divergences between price action and the RSI can foreshadow reversals, while others argue that readings above 80 or below 20 represent more extreme conditions that can signal a continuation of the current trend rather than a reversal.
Ultimately, it is up to each individual trader to decide how they will use the Relative Strength Index in their own trading strategy. There is no right or wrong way to interpret the indicator; what matters most is finding a method that works best for you and your unique trading style.
How to use RSI to make smart trading decisions
There are a number of different ways to calculate RSI, but one of the most common is to use a 14-day period. To calculate RSI using this method, simply take the average gain over the last 14 days and divide it by the average loss over the last 14 days. The resulting number is then multiplied by 100 to produce a value between 0 and 100.
For many traders, making decisions based on RSI, or Relative Strength Index, is a smart move. It is important to keep in mind that RSI is a lagging indicator, which means that it can provide false signals in choppy markets. As a result, it is always important to confirm RSI signals with other technical indicators before making any trading decisions.
Disclaimer: these articles are for educational purposes only. Market analysis, prices, news, trade ideas, or any other information within this site or the chatroom is not investment advice.