Relative Strength Index (RSI)

The Relative Strength Index, also known as RSI, is a technical indicator that simply measures the magnitude of a stock’s recent gains to its recent losses. It is useful for determining momentum of a particular stock.

There is mathematical equation, but most people will utilize RSI within the tools of a chart. The only customized option for RSI is the period length you want to examine. Obviously long-term traders will prefer extended periods such as 30, while many swing traders will find 14 more significant. It is up to the trader to play around and determining which is best for them.

If you are familiar with stochastic, then understanding RSI won’t be too difficult. The main difference is the cycle number of 30 to 70.

Relative Strength Index Uses

Overbought/Oversold

In general RSI ranges between 30 and 70. Below 30 classifies oversold and above 70 distinguishes overbought. Many traders look at RSI falling below 70 as a bearish signal and breaking above 30 as a bullish indicator.

Centerline

The middle of the range stands at 50, and can also be used as various confirmations of different price movements. Consider RSI coming from 70 and bouncing off 50 to head higher. That is looked at as a bullish indicator. Obviously, the opposite of coming from 30 and bouncing down off 50 is looked at as bearish. Traders also look at a crossover of the line as final confirmation that the stock’s current momentum is ready to change.

Example

As you can see from the chart above, RSI does a good job of predicting change in momentum. Within this example, the 50 line acted as a pretty substantial barrier. Until Intel was able to move past it, the stock could never really head higher.

Where the stock stands now, if the RSI was to head below 50, then that would be a bearish indicator.