Relative Strength Index (RSI) is a technical indicator used in trading to measure the strength of a security’s price action. It compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. RSI is a momentum oscillator that measures the speed and change of price movements.
The RSI indicator is typically presented as an oscillator that oscillates between 0 and 100. It is calculated by taking the average of the gains over a given period and dividing it by the average of the losses over the same period.
A value of 70 or above is considered to indicate an overbought condition, while a value of 30 or below is considered to indicate an oversold condition. Traders often use RSI in conjunction with other indicators or chart patterns to confirm trade signals.
Traders can use RSI to identify potential entry and exit points for trades by looking for divergences and overbought/oversold conditions. A bullish divergence occurs when the RSI is making new highs while the security is making lower lows, indicating a potential reversal to the upside. A bearish divergence occurs when the RSI is making new lows while the security is making higher highs, indicating a potential reversal to the downside.
It’s important to note that RSI is just one of many technical indicators and should not be used in isolation to make trading decisions. It should be used in conjunction with other indicators and chart patterns, and be combined with fundamental analysis to get a better understanding of the market.
