How to use Relative Strength Index (RSI).
What is the Relative Strength Index?
The Relative Strength Index (RSI) is a short term momentum indicator. It's used in technical analysis to identify the strength of a stock's price change and determine if it is overbought or oversold. The RSI is an oscillator that has readings between 0 and 100. An oscillator is a line graph that moves between two extremes. It usually has a numerical value, such as 0-100.
How does RSI work?
RSI values below the 30 line are considered oversold or undervalued. Prices above the 70 line are considered overbought or overvalued. These values help traders and investors identify possible trend reversals or price pullbacks.
What does the RSI consist of?
The RSI consists of a formula calculated in a set period of time. Typically, the RSI is calculated from a 14 day period. The RSI will move lower if the price in a particular stock closes lower and will move upwards if it closes higher within the 14 day period. This movement in price helps identify short term bearish and bullish momentum. It also helps identify potential price reversals when it is oversold or overbought.
Do oversold and overbought values change?
Yes, the values do change. The best comparison that I can make is to support and resistance levels in a stock's price. A trader can draw lines to identify newly oversold or overbought values based on previous oscillator history. These new values can serve as pullback signals as the price continues its momentum in any particular direction. In the illustration below, you will notice an example of how the 57 level becomes a new oversold value (support), and the 81 level becomes the new overbought value (resistance) as the stock's price continues its bullish trend. With these new levels, traders can determine pullback and resistance levels.
Does the RSI show divergence?
Like the MACD, the RSI does show divergences that can also help identify possible trend reversals. A divergence occurs when the RSI is moving in the opposite direction than the price action.
Is there more to know about the RSI?
The RSI is a lagging indicator, which means that it reacts to price action. This means that the RSi will sometimes give false signals since it follows the price after it has moved. In some cases, the price might already be reversing before the RSI can react, giving a false signal. Traders should be aware of these false readings and understand the risks involved in depending solely on indicators.
**This is a condensed explanation of the RSI indicator used for educational and entertainment purposes only. Pennystocksclub13 intends to educate beginner traders with easily accessible and simplified information to shorten the learning curb. Traders should always do their due diligence and continue educating themselves about the risks involved with trading.
Disclaimer: Results may not be typical and may vary from person to person. Making money trading stocks takes time, dedication, and hard work. There are inherent risks involved with investing in the stock market, including the loss of your investment. Past performance in the market is not indicative of future results. Any investment is at your own risk!