Understanding RSI (Relative strength Index)

Introduction

The name “Relative Strength Index” is slightly misleading as the Relative Strength Index does not compare the relative strength of two securities, but rather the internal strength of a single security.  Relative Strength Index (RSI) is a very popular momentum indicator.

What does it measure?

RSI measures the speed and change of price movements. RSI oscillates between zero and 100. When the RSI line moves higher, it is understood that price is enjoying increased strength and as the RSI line moves lower, it is understood that the price is suffering from a lack of strength. However, technical analysts believe that a value of 30 or below indicates an oversold condition and that a value of 70 or above indicates an over bought condition.

When Wilder introduced the Relative Strength Index in 1978, he recommended using a 14-day Relative Strength Index.  Since then, the 9-day and 25-day Relative Strength Indexes have also gained popularity. The most popular is the 14 day RSI. Shown below is an example of how the RSI would be displayed below your stock prices chart

Tips for Using the RSI Indicator

  • As with all technical indicators, RSI is a way of measuring odds – it’s not a full-blown, fool-proof ‘system’ to gauge price trends. It is usually best used in conduction with other indicators.
  • Though considered an oscillator, the relative strength index has qualities of momentum indicators, and can be used in that capacity. For instance, some investors interpret a cross of the 50 level (the mid-point of the scale) as a signal of momentum – bullish or bearish – in itself.
  • If the stock has been trending up, but the relative strength indicator starts to trend down, there is a divergence and you would prepare to enter a bearish trade (down direction). It’s the vice versa for bullish trades.
  • Once the stock becomes overbought (RSI reaches the point 70) or oversold (RSI at 30), or has price divergence you should always wait for some type of confirmation that a price reversal has indeed occurred.
  • RSI should not be used in isolation. It must be used in combination with other indicators to help build a clear picture.
  • The RSI oscillator should not be confused with another trading tool – unfortunately called – the ‘Relative strength’. The other tool compares a stock’s or index’s performance to other stocks or indices in a group, and ranks that stock or index, assigning a ‘relative strength’ score. The other tool is powerful too, but is unrelated to the RSI indicator discussed here.

RSI is a versatile momentum oscillator that has stood the test of time. Hope you have got information about RSI and how it can be used to take decisions.

You may like these posts:

  1. Types of indicators/Oscillators
  2. Understanding Average Directional Index (ADX)
  3. Oscillators

8 Responses to “Understanding RSI (Relative strength Index)”

Kailash Mahadevan

March 10, 2011 at 11:21 am

Hiii Mr.Victor..
How r u??
can u tell me wat do you mean by an oversold/overbuoght stock???
Also what interpretation should i derive as an investor on these terms??
Waiting for a speedy response from you…!!
Thank You

J Victor

March 12, 2011 at 11:28 am

Here’s your answer .

http://www.sharemarketschool.com/oscillators/

Once you see a stock graph showing over bought / oversold conditions, that gives you an alert signal. A stock can remain in an oversold / over bought condition for a long time. Investigate into the reason why there’s such a heavy interest in buying shares ( in case of an over bought signal ) or Why there’s such a lack of demand ( in case of an over sold signal) . There can be many reasons for this including heavy speculation.

Leo Rogel

September 23, 2011 at 8:11 am

Howdy! Would you mind if I share your blog with my twitter group? There’s a lot of people that I think would really appreciate your content. Please let me know. Many thanks

Kymberly Symmonds

October 11, 2011 at 2:23 am

Fine guide,There’s no doubt that you’ve absolutely established a site I would like to read up on weekly. Thank you.

Daniel Haggins

October 22, 2011 at 6:02 pm

Fantastic post, I surprisingly had a good time studying it, keep up all the good efforts.

Kathline Hayn

October 26, 2011 at 3:04 pm

I most certainly like this post!

Bennie Leavelle

May 30, 2012 at 1:19 am

Definitely, what a magnificent website and educative posts, I definitely will bookmark your blog.Best Regards!

Pylur Viswanath

July 5, 2012 at 4:49 pm

Hi

First of all your write ups are brilliant. You have covered quite a lot of basic techinical stuff. Often it is mentioned that RSI or MACD or anything else cannot be used in isolation.Can you give some examples which pairing goes well with some real examples. Appreciate it

regards

Leave a Comment