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Relative Strength Index (RSI)
Developed by J. Welles Wilder, the Relative Strength Index (RSI) is a momentum
oscillator that measures the speed and change of price movements. RSI oscillates
between zero and 100. Traditionally, and according to Wilder, RSI is considered
overbought when above 70 and oversold when below 30. Signals can also be generated
by looking for divergences, failure swings and centerline crossovers. RSI can
also be used to identify the general trend.
RSI is an extremely popular momentum indicator that has been featured in
a number of articles, interviews and books over the years. In particular, Constance
Brown's book, Technical Analysis for the Trading Professional, features the
concept of bull market and bear market ranges for RSI. Andrew Cardwell, Brown's
RSI mentor, introduced positive and negative reversals for RSI. In addition,
Cardwell turned the notion of divergence, literally and figuratively, on its
head.
RSI is considered overbought when above 70 and oversold when below 30. These
traditional levels can also be adjusted to better fit the security or analytical
requirements. Raising overbought to 80 or lowering oversold to 20 will reduce
the number of overbought/oversold readings. Short-term traders sometimes use
2-period RSI to look for overbought readings above 80 and oversold readings
below 20.
As in most other technical indicators, the RSI calculation has a "step"
period. The default for RSI step is 14, but smaller numbers will increase its
sensitivity.
Example
or RSI in PowerScan. The RSI running across this chart shows, from left to right, 2
examples of an oversold condition (RSI below 30), and an overbought condition
(RSI above 70).
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