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Relative Strength Index PDF Print E-mail

Developed by J. Welles Wilder.
This indicator is an extremely useful and popular momentum oscillator and it's a technical  indicator used to  compare the magnitude of recent gains to recent losses to determine overbought and oversold conditions in the market.
The Relative Strength Index (RSI) compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100.

  • Overbought/Oversold

Wilder recommended using 70 and 30 and overbought and oversold levels. The RSI is considered bullish for the underlying stock, if it rises above 30. And if the RSI falls below 70, it is considered a bearish signal. If the long-term trend is bullish, then oversold readings could mark potential entry points.

  • Divergences

Buy and sell signals can also be generated by looking for positive and negative divergences between the RSI and the underlying stocks. According to the underlying stock will often reverse its direction soon after such a divergence.

  • Centerline Crossover

The centerline for RSI is 50. Readings above and below can give the indicator a bullish or bearish tilt. On the whole, a reading above 50 indicates that average gains are higher than average losses and a reading below 50 indicates that losses are winning the battle.

RSI is a famous  tool because it can  be used to indicate  the trend formations. When you find a trend is forming, you can take a look at the RSI and look at if it is up or under 50. If you are looking at a possible uptrend, you should be sure to make the RSI up 50. And when you are looking at a possible downtrend, you can make sure the RSI is under 50.

 

Relative Strength Index

We can see in the chart  that a possible uptrend was forming. To avoid the fakeouts, we should wait for the RSI to cross above 50 to confirm the trend. It will be a good indication that an uptrend has formed, When the RSI passes up 50.

 

We have many types  of indicators, let's see how we can put all of what you just learned together...
 
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