Relative Strength Index RSI Overview, Guide, How RSI Works

what is relative strength index

As with any technical analysis​ study, the RSI can be used in conjunction with other tools, including the 200-day moving average​. In the above chart, Apple shares consolidated around the 200-day moving average in February. There is generally no RSI formula that can be relied on to determine when the rebound will occur. This means that prices could remain below 20 for months before experiencing a rebound.

  • The stock moved to new highs in September-October, but RSI formed lower highs for the bearish divergence.
  • An asset is usually considered overbought when the RSI is above 70 and oversold when it is below 30.
  • To see RSI, click the ‘technical’ tab on the chart and scroll across to RSI.
  • Signals can also be generated by looking for divergences, failure swings and centerline crossovers.
  • As you can see in the following chart, a bullish divergence was identified when the RSI formed higher lows as the price formed lower lows.

The stock peaked soon after RSI reached 70 and bottomed soon after the stock reached 30. Dynamic momentum index is technical indicator that determines if a security is overbought or oversold and can be used to generate trading signals. Since the indicator displays momentum, it can stay overbought or oversold for a long time when an asset has significant momentum in either direction.

Positive and negative RSI reversals

Trend lines and moving averages are helpful technical tools to include when using the RSI in this way. The RSI can do more than point to overbought and oversold securities. It can also indicate securities that may be primed for a trend reversal or corrective pullback in price. Traditionally, an RSI reading of 70 or above indicates an overbought situation. Stands for relative strength, and we calculate it with the average gains and average losses during the specified period . Bonds, commodities, and stocks increase and decrease in price following business cycles of economic growth and shrinkage. We can identify the point where the cycle changes from the positive side to the negative side by measuring momentum, allowing you to sell the business when it is about to crash.

what is relative strength index

Over that 14-day period, determine the stock’s average gain in price on days when it rises from the previous day, and the average loss for days when it is down from the previous day. The relative strength is calculated by dividing the average gain by the average loss. Overbought describes a period with a significant and consistent upward movement in price over time without much pullback. Overbought conditions may indicate a price correction or trend reversal and signal traders to exit a position. The Relative Strength Index is among the most popular technical indicators, helping traders determine potentially good buy entry points and sell points . It is also frequently watched for divergence signals of possible upcoming trend changes.

Interpretation of RSI and RSI Ranges

Conversely, it remains in the range of during a downward or bear market, with resistance in the range of 50 to 60. Factors like RSI parameters, the investment trend, and the market determine these ranges. A positive reversal forms when RSI forges a lower low and the security forms a higher low. This lower low is not at oversold levels, but usually somewhere between 30 and 50. Chart 11 shows MMM with a positive reversal forming in June 2009. MMM broke resistance a few weeks later and RSI moved above 70.

what is relative strength index

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How does the RSI indicator work?

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  • If the security is caught in a significant downtrend, then it might continue trading at an oversold level for quite some time.
  • Despite changes in volatility and the markets over the years, RSI remains as relevant now as it was in Wilder’s days.
  • Essentially the RSI, when graphed, provides a visual mean to monitor both the current, as well as historical, strength and weakness of a particular market.
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Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities magazine in the June 1978 issue. Investopedia requires writers to use primary sources to support their work. These include white papers, government data, original reporting, and interviews with industry experts. We also reference original research from other reputable publishers where appropriate.

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Failure swings are a pattern in the RSI itself, independent of price action, that can be used to identify when a reversal is likely to occur. A bullish failure swing occurs when the RSI drops just below 30 briefly and then bounces, before falling back down to hold just above 30. If the RSI bounces again and breaks its prior high, a failure swing is said to have occur and should predict a significant price movement. A bearish failure swing follows the opposite what is relative strength index pattern around an RSI of 70, with the RSI bouncing below its previous low indicating a failure swing. Since this is a momentum indicator, we need to combine it with other trading indicators to get reliable buy/sell signals. In this case, we will use the RSI together with the simple moving average of 7, 20, and 50 days. If the asset is uptrending and the market is bullish, the RSI usually ranges from 40 to 90, where the zone acts as a support line.

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