Index Trading Wiki - Deciphering The Relative Strength Index (RSI)

Index Trading Wiki

Index Trading Wiki

The Relative Strength Index is a momentum oscillator developed by J. Welles Wilder which is used to measure the rate-of-change of a stock's price and should not be confused with the Relative Strength (or Comparative Relative Strength) (RS) indicator, which actually compares two securities. The RSI is computed as follows:

RSI = 100 - 100 / (1 + RS)

RS = (total gains / n) / (total losses / n)

n = number of RSI periods used to build the indicator Index Trading Wiki

Any reading above 70 typically indicates an overbought position and any reading under 30 suggests an oversold condition. In practical terms, oversold means the average losses are greater than the average gains. Overbought means just the opposite in that the stock's gains are out pacing losses. Since a stock can make small gains and losses from day to day, readings between 30 and 70 are not considered as significant as the readings outside that range. There a number of stock trading systems and strategies which utilize the RSI to assist in creating buy and sell signals.

Sometimes the RSI can give traders false signals. Divergences in the indicator and the actual stock price are very common which is why most traders utilize the RSI in conjunction with other indicators which may provide confirmation of those signals and prevent trade from becoming ensnared in whipsaws or price reversals. Keep these things in mind when using the RSI. It should never be used as the sole source of buy and sell signals, but should be combined with several other indicators to confirm price moves and market sentiment.

There is no magic indicator in the stock market, but there are many indicators that, when used properly, can boost your chances of making more money from your trades. RSI will serve the trader over the short and long term trading cycles. Keeping an eye on the strength and the direction of the underlying price action of a security can help investors make the right buy and sell decisions. Index Trading Wiki

Index Trading Wiki - Deciphering The Relative Strength Index (RSI)

By: Trading Expert

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