What is RSI?

Relative Strength Index (RSI) Lesson

• Definition: RSI is a momentum oscillator that measures the speed and change of price movements, indicating overbought or oversold conditions.
• Calculation:
• Formula: RSI = 100 - [100 / (1 + RS)], where RS = Average Gain / Average Loss over a specified period (typically 14 days).
• Compares the magnitude of recent gains to recent losses.
• Range:
• Scale from 0 to 100.
• Above 70: Overbought (potential price decline).
• Below 30: Oversold (potential price increase).
• Uses:
• Identify potential reversals or trend strength.
• Spot divergence: Price moving opposite to RSI may signal a trend change.
• Confirm trends: RSI above 50 often confirms bullish trends, below 50 bearish.
• Trading Signals:
• Buy: RSI crosses above 30 or shows bullish divergence.
• Sell: RSI crosses below 70 or shows bearish divergence.
• Limitations:
• False signals in strong trends (e.g., RSI may stay overbought/oversold for long periods).
• Works best in range-bound markets, less effective in trending markets.
• Practical Tips:
• Combine with other indicators (e.g., moving averages) for confirmation.
• Adjust period (e.g., 9 or 21 days) for sensitivity: shorter for faster signals, longer for smoother trends.
• Monitor for centerline (50) crossovers to gauge momentum shifts.