Relative strength index (RSI)
What is the relative strength index?
The relative strength index (RSI) is one of the most popular technical analysis indicators. It works as an oscillator, measuring current price strength relative to previous prices. As a momentum indicator, the relative strength index tracks magnitude of recent asset price fluctuations.
The RSI tool is a multipurpose indicator, which may be used to produce buy and sell signals, to track price direction and to generate alerts regarding possible price reversals, as well as to display oversold and overbought market conditions.
Where have you heard about the relative strength index?
The relative strength index was developed by J. Welles Wilder Jr. and first coined in his book “New Concepts in Technical Trading Systems” in 1987. In spite of being created before the digital age, Mr. Wilder’s indicator is still extremely popular among traders.
What you need to know about relative strength index
A versatile oscillator, the RSI has survived the time test and keeps its leading position among other technical indicators. The relative strength index is displayed as a line graph, moving between two extremes – an oscillator – and can have a value ranging from 0 to 100.
According to a traditional relative strength index meaning, all values above 70 may indicate that an asset is being overbought and may be ready for a trend reversal or pullback. On the other hand, an RSI value below 30 may signal that the asset is being oversold and undervalued. These lines are called the overbought and oversold lines.
The RSI shows a potential buy signal when the RSI crosses and moves above the oversold line (30). The RSI shows a potential sell signal when the RSI crosses below the overbought line (70).
A trader may vary the time period of the relative strength indicator. This will help to increase or decrease the number of buy and sell signals. By default, the RSI presupposes a 14-day period, however the trader may choose another time frame.
For example, if you take a standard 14-day period vs. a shorter 7-day period, you may see that the shorter timeframe makes the RSI look more volatile and increases the number of buy and sell signals.
If the asset is uptrending and the market is bullish, the RSI usually ranges from 40 to 90, where the 40-50 zone acts as a support line. During a downtrending movement, when the market is bearish, the RSI ranges from 10 to 60, with the 50-60 zone acting as a resistance line. The asset in an uptrend may stand within the overbought zone for an extended period of time. At the same time, the asset in a downtrend may stay within the oversold zone.