Relative Strength Index (RSI)
Relative Strength Index
- Relative Strength Index Defined
- RSI Alternative Possible Buy and Sell Signals and Divergences
The Relative Strength Index (RSI) is one of the more popular technical analysis tools; it is an oscillator that measures current price strength in relation to previous prices. The RSI can be a versatile tool, it might be used to:
- Generate potential buy and sell signals
- Show overbought and oversold conditions
- Confirm price movement
- Warn of potential price reversals through divergences
The chart below of eBay (EBAY) shows some potential buy and sell signals:
RSI Potential Buy Signal
A trader might buy when the RSI crosses above the oversold line (30).
RSI Potential Sell Signal
A trader might sell when the RSI crosses below the overbought line (70).
Varying the time period of the Relative Strength Index might increase or decrease the number of buy and sell signals. In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day. Notice how in this example, decreasing the time period made the RSI more volatile, increasing the number of buy and sell signals substantially.
There is another way a trader might interpret Relative Strength Index buy and sell signals. This, and how to interpret RSI divergences, is all contained on the next page.
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