Some traders consider it a buy signal if a security’s RSI reading moves below 30. This is based on the idea that the security has been oversold and is therefore poised for a rebound. However, the reliability of this signal will depend in part on the overall context. If the security is caught in a significant downtrend, then it might continue trading at an oversold level for quite some time. Traders in that situation might delay buying until they see other technical indicators confirm their buy signal.
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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…
What Does RSI Mean?
The relative strength index (RSI) measures the price momentum of a stock or other security. The basic idea behind the RSI is to measure how quickly traders are bidding the price of the security up or down. The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that…
Example of RSI Divergences
An RSI divergence occurs when price moves in the opposite direction of the RSI. In other words, a chart might display a change in momentum before a corresponding change in price. A bullish divergence occurs when the RSI displays an oversold reading followed by a higher low that appears with lower lows in the price. This may…
Modify RSI Levels to Fit Trends
The primary trend of the security is important to know to properly understand RSI readings. For example, well-known market technician Constance Brown, CMT, proposed that an oversold reading by the RSI in an uptrend is probably much higher than 30. Likewise, an overbought reading during a downtrend is much lower than 70.2 As you can see…
Limitations of the RSI
The RSI compares bullish and bearish price momentum and displays the results in an oscillator placed beneath a price chart. Like most technical indicators, its signals are most reliable when they conform to the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example,…
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…