Relative Strength Index (RSI) is an important technical analysis tool used by traders around the world to make buy and sell decisions on individual stocks and the market as a whole. Learning how to use the RSI can be a gateway to great profits.
.History The Relative Strength Index is one of the most popular technical analysis tools in existence across all markets. It was invented by a famous market technician named Welles Wilder, Jr., and first published in his 1978 book, "New Concepts in Technical Trading Systems."
Significance The RSI has become one of the most popular technical indicators in the world, and is used by millions of traders to analyze almost every market in existence, from stocks, to bonds, to currencies and commodities.
Features The RSI is an oscillator that is plotted on a vertical scale from 0 to 100. Readings below 30 indicate that the market being measured is oversold and possibly due for a bounce, while readings above 70 indicate a market is overbought, and perhaps due for a correction.
Time Frame Traders use the RSI on almost every conceivable time frame, from very short-term intraday charts to monthly charts. The RSI itself can be configured to measure almost any time period, from the last 30 minutes to 30 weeks.
Theories/Speculation Although an oscillator, some traders also use the RSI to gauge the strength and trend continuity of the stock they're analyzing by looking for positive or negative divergences. A negative divergence is formed when a stock price makes a new relative high without the RSI making a corresponding high, while a positive divergence is formed when the RSI makes a new relative high before the stock price.
Warning When using the RSI as an oscillator, be aware that even when it is signaling that a stock's price is overbought or oversold, the stock can continue moving strongly in the same direction. The RSI is most effective during times when stocks channel, rapidly moving from overbought to oversold, and least effective during phases were the market trends strongly.