Welcome to the Investors Trading Academy talking glossary of financial terms and events.
Our term of the day is “RSI – Relative Strength Index”
The Relative Strength Index is a momentum oscillator that measures the speed and change
of price movements.
An RSI calculation oscillates between zero and 100.
Traditionally RSI is considered overbought when above 70 and oversold when below 30.
Signals can also be generated by looking for divergences, failure swings and centerline
crossovers.
RSI can also be used to identify the general trend.
A technical RSI compares the magnitude of recent gains to recent losses in an attempt
to determine overbought and oversold conditions of an asset.
A trader using RSI should be aware that large surges and drops in the price of an asset
will affect the RSI by creating false buy or sell signals.
Like many momentum oscillators, overbought and oversold readings for RSI work best when
prices move sideways within a range.
RSI is presented on a graph above or below the price chart.
The indicator has an upper line, typically at 70, a lower line at 30 and a dashed mid-line
at 50.
The movement of the price between these lines gives strong signals to buy or sell an asset.
Divergence between RSI and price action is a very strong indication that a market turning
point is imminent.
Bearish divergence occurs when price makes a new high but the RSI makes a lower high,
thus failing to confirm.
Bullish divergence occurs when price makes a new low but RSI makes a higher low.