Part 3: Relative Strength Index (RSI)
The RSI (Relative Strength Index) is a popular technical analysis oscillator. There are numerous uses of the RSI, including objective buy and sell signals and bullish and bearish divergences. The RSI, as its name implies measures the relative strength of price currently compared to the past: the formula usually uses a 14-period input. As an oscillator, above 70 is considered overbought and below 30 is considered oversold.
Summary
Relative strength is useful for indicating extremes of trading behaviour, although should be used along with other indicators to prevent false alarms.
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Matthew Hewlett is a contributor to the website http://www.OnlineTradingConcepts.com and specializes in using technical analysis to trade stock index futures, stock options, and stock index options.
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Some traders use the RSI for objective buy and sell signals. They usually interpret a buy signal as occuring when the RSI crosses back above 30 after spending time in the oversold area. A sell signal is declared when the RSI moves back below 70 after spending a period of time in the overbought region. The RSI as well as buy and sell signals is visually depicted in the link to the chart Relative Strength Index.
Another popular use of the Relative Strength Index for stock, futures, or currency traders is bullish and bearish divergences. At times when price is increasing, but the RSI is falling or not moving, this can signal trouble. This bearish divergence can suggest that a trader exit his/her position.
In contrast, when price is falling, but the RSI is failing to go lower, but is maintaining steady or rising, a bullish divergence has occurred. A trader might exit any short positions.
The RSI is a very useful tool for traders and is quite versatile. To learn more about technical analysis, visit http://www.onlinetradingconcepts.com/TechnicalAnalysis.html . There are over 66 technical indicators with explainations and charts with examples.
Trading is inherently risky; only trade with money that you can afford to lose. Past performance is not indicative of future performance.
Article Tags:
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