RSI (Relative Strength Index)

RSI (Relative Strength Index)

What It Is

RSI is a momentum oscillator that measures the speed and magnitude of a stock's recent price changes to evaluate overbought or oversold conditions.

Scale

RSI ranges from 0 to 100:

• Above 70: Overbought (potential sell signal)
• Below 30: Oversold (potential buy signal)
• 50: Neutral momentum

How to Read RSI

1. Overbought Territory (70-100)

• Stock may be due for a pullback
• Consider taking profits or waiting

1. Oversold Territory (0-30)

• Stock may be due for a bounce
• Potential buying opportunity

1. Divergence

• Price makes new high, RSI doesn't: Bearish signal
• Price makes new low, RSI doesn't: Bullish signal

Example Interpretation

If RSI = 75:

• Stock is in overbought territory
• Recent gains may be excessive
• Watch for potential reversal
• Don't automatically sell - confirm with other indicators

Best Practices

• Don't use RSI alone - combine with price action
• Strong trends can stay overbought/oversold for extended periods
• Look for divergences for early reversal warnings
• Adjust timeframe based on trading style

Limitations

• Can give false signals in strong trends
• Overbought doesn't mean immediate sell
• Works best in ranging markets