The relative strength index is a moving indicator that measures the magnitude of recent gains or losses relative to each other. The index is generated using the following equation:
RSI = 100 – (100/(1+(average of x days up closing price / average of x days down closing price))
There is no right point on the indicator, it is just a repeatable tool that can be built into your general trading plan. However, in general a stock is thought to be over bought when the RSI is greater than 70 and oversold when the RSI is less than 30. I often refer to crossing the 50 in my trading plans as I believe this is an indicator that the trend is set and momentum is on your side.
Again, do remember not to use RSI index as a sole trading strategy, it is only a tool.
Here’s an example:
Large price fluctuations can really throw RSI into a frenzy so make sure your aware of macro situations involving your trades.
Related posts:
- Moving Averages
- Trading Bollinger Bands
- MACD – Moving Average Convergence Divergence
- MACD Indicator Issues
- Stock Market ETF (Exchange Traded Fund)
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[...] good trading strategy will use the MACD as one indicator just not the only indicator. RSIand volume are often used in conjunction with other chart patterns, indicators, and fundamental [...]
[...] can see the price has crossed the 50 day SMA with lots of room above to the 200 day. Also the RSI has just crossed the 50 and the MACD is nearly positive. These are all positive signs for a [...]