Relative Strength Index (RSI)

Relative Strength Index indicator
Image from StockCharts.com

 

The Relative Strength Index indicator was developed by J. Welles Wilder and is a popular momentum indicator primarily used to identify overbought and oversold conditions. Readings above 80 generally point to an overbought condition while readings under 20 depict oversold conditions.

 

A few tips for using the Relative Strength Index;

  • Avoid trusting this indicator after an extreme move up or down as the indicator can alert false buy or sell signals.
  • Always use the RSI in conjunction with another supporting form of analysis.
  • Consider altering the time period settings or wait for price confirmation of a signal in periods of false signals.

 

In all honesty, I very rarely use RSI unless I’m researching new trading methods but it’s widely accepted so you should be aware of it.

 

One last note – Much like the MACD, the RSI can be used to identify a divergence in price and for a review on those please take a look at the MACD indicator page. As an example, when price continues higher but RSI moves lower this could be the signal a trader needs to initiate a position to the downside or vice versa for a position to the upside.

 

That’s it… simple stuff for a veteran like yourself. Leave me a message below if you have any questions.

 

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