Welles Wilder, the Relative Strength Indicator (RSI) is a popular technical analysis tool used to measure the strength of price movements and identify potential buy and sell signals for various assets including stocks, bonds, and more.
The RSI is a momentum oscillator that calculates overbought and oversold conditions based on the magnitude and speed of price changes over a specified time period.
Traders often use the RSI to generate sell signals at or above 70 and buy signals at or below 30. However, it can also be used to identify bullish and bearish divergences and potential trend changes.
The RSI is calculated by dividing the current price by the high-low range of prices over a specified time period. For example, if the range over the last 14 days is 100 points and the price is currently 50 points above the low, the RSI would be 50.
The time period used for calculating the RSI should be determined by the underlying volatility of the asset. For more volatile assets, a longer time period may be needed, while less volatile assets may require a shorter time period.
above 70) for extended periods of time, generating false sell signals.
Similarly, in a strong downtrend, the RSI can remain oversold (i.e. below 30) for extended periods of time, generating false buy signals.
Therefore, it is important to use the RSI in conjunction with other indicators and technical analysis tools to confirm trading decisions.
Overall, the RSI is a versatile and widely used indicator that can be a valuable tool in a trader’s arsenal when used correctly.
However, like any indicator, it is not infallible and should be used in conjunction with other analysis to achieve the best results.