Relative Strength Index (RSI): Importance & Calculations
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements in a security, indicating overbought or oversold conditions and potential trend reversals.
The RSI is calculated based on the ratio of average gains to average losses over a specified period, typically 14 days, and is expressed on a scale of 0 to 100. A high RSI value (usually above 70) suggests that a security may be overbought and due for a price correction or reversal, while a low RSI value (usually below 30) indicates that a security may be oversold and poised for a price rebound or rally.
Traders and investors use the RSI to identify entry and exit points, confirm trend signals, and assess the strength and sustainability of price movements. RSI divergence, bullish and bearish reversals, and overbought/oversold conditions are key signals used in technical analysis to guide trading decisions and manage risk.
The RSI is a versatile and widely used technical indicator that complements other analytical tools and helps traders interpret market dynamics, anticipate price movements, and improve trading performance.