As a momentum indicator, the relative strength index compares a security’s strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give traders an idea of how a security may perform. The RSI, used in conjunction with other technical indicators, can help traders make better-informed trading decisions.
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Overbought or Oversold
Generally, when the RSI indicator crosses 30 on the RSI chart, it is a bullish sign and when it crosses 70, it is a bearish sign. Put another way, one can interpret that RSI values of 70 or above indicate that a security is becoming overbought or overvalued. It may be primed for a trend reversal or corrective price pullback. An…
The Difference Between RSI and MACD
The moving average convergence divergence (MACD) is another trend-following momentum indicator that shows the relationship between two moving averages of a security’s price. The MACD is calculated by subtracting the 26-period exponential moving average (EMA) from the 12-period EMA. The result of that calculation is the MACD line. A nine-day EMA of the MACD, called the signal line, is then plotted on top…
Calculating RSI
The RSI uses a two-part calculation that starts with the following formula: RSI_{\text{step one}} = 100- \left[ \frac{100}{ 1 + \frac{\text{Average gain}}{\text{Average loss} }} \right]RSIstep one=100−[1+Average lossAverage gain100] The average gain or loss used in this calculation is the average percentage gain or loss during a look-back period. The formula uses a positive value for the average loss….
What Is the Relative Strength Index (RSI)?
The relative strength index (RSI) is a momentum indicator used in technical analysis. RSI measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. The RSI is displayed as an oscillator (a line graph) on a scale of zero to 100. The indicator was developed by J. Welles…
Plotting RSI
After the RSI is calculated, the RSI indicator can be plotted beneath an asset’s price chart, as shown below. The RSI will rise as the number and size of up days increase. It will fall as the number and size of down days increase. As you can see in the above chart, the RSI indicator…
Example of Positive-Negative RSI Reversals
An additional price-RSI relationship that traders look for is positive and negative RSI reversals. A positive RSI reversal may take place once the RSI reaches a low that is lower than its previous low at the same time that a security’s price reaches a low that is higher than its previous low price. Traders would…