Technical Analysis Using Relative Strength Index (RSI)

Relative Strength Index (RSI) is a valuable technical indicator developed by J. Welles Wilder for analyzing the momentum of stock prices. Momentum refers to the speed and direction of price changes at a specific time interval. RSI determines overbought or oversold conditions by watching over the changes of closing prices within a recent trading period.

How To Interpret RSI

RSI computes the ratio between the magnitude of the stock’s gains versus losses. It is measured in a scale of 0 to 100. A stock is oversold if its RSI is below 30, while a stock is overbought if the RSI is above 70. An RSI of 50 means there is no trend, while an RSI between 30 and 70 is neutral territory.

To summarize,

Oversold – RSI below 30 where magnitude of losses is greater than gains. This is normally a signal to SELL.

Overbought – RSI above 70 where magnitude of gains is greater than losses. This is normally a signal to BUY.

RSI charts are available through stock softwares or websites such as Morningstar.

In Conclusion

RSI is best used with Moving Average Crossovers and other technical indicators.

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