Technical Indicators: Relative Strength Index (RSI)
What Is a Technical Indicator?
Technical indicators are heuristic or mathematical calculations based on the price, volume, or open interest of a security or contract used by traders who follow technical analysis. Technical analysts or chartists look for technical indicators in historical asset price data to judge entry and exit points for trades.
By analyzing historical data, technical analysts use indicators to predict future price movements. Examples of common technical indicators include the Relative Strength Index (RSI), Money Flow Index (MFI), stochastics, moving average convergence divergence (MACD), and Bollinger Bands.
Relative Strength Index (RSI)
RSI is an indicator that evaluates overbought or oversold conditions in the price of an asset. The RSI is a line graph that moves between two extremes and has a reading from 0 to 100. Traditional usage of the RSI is that:
- Values of 70 or above indicate that an asset is becoming overbought and may be primed for a trend reversal or experience correction.
- An RSI reading of 30 or below indicates an oversold or undervalued condition presenting a possible buying opportunity.
Other reading to look for:
An RSI between 30 and 70 can be considered neutral and an RSI around 50 signify “no trend”.
Some might consider any number above 80 as overbought and anything below 20 as oversold. This is entirely at the trader’s discretion.
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