The Relative Strength Index (RSI) is a technical indicator used in the technical analysis of financial markets. The Relative Strength Index was developed by J. Welles Wilder and published in a 1978 book. RSI is a momentum oscillator that measures the velocity and magnitude of price movements. The RSI Indicator is a a good tool to help identify overbought and oversold conditions, divergences, and crossovers that investors use to identify new trends in a stock or the market.
The RSI is most typically used on a 14 day time frame, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. RSI is considered overbought when above 70 and oversold when below 30.
It is calculated using the following formula:
RSI= 100 -100/1+RS
RS = Average Gain / Average Loss
Like most indicators there are two general ways in which the indicator is used to generate signals – crossovers and divergence. In the case of the RSI, the indicator uses crossovers of its overbought, oversold and center line(see also stochastic).
An RSI below 30 indicates an oversold condition, acting as a warning to the investor to be ready to buy the best set ups. As the RSI indicator rises through 30, it gives a buy signal. This is especially true if the long-term trend is up, as the RSI rises through 30, creating potential entry points.