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What is RSI?
The RSI or Relative Strength Index was created by J Wells
Wilder Jr. and uses a 14 day period to calculate a ratio showing
the number of the times a financial instrument gained in value
to the number of times it declined in value. The ratio is subtracted
from 100.
If the RSI is above 70 then the financial instrument is considered
to be overbought and an RSI value below 30 indicates the financial
instrument is oversold. If the instrument is more volatile,
you can expand your overbought and oversold parameters to 80
and 20. Some traders use the RSI to generate buy and sell signals.
A sell signal would occur if the RSI crosses above 70 then crosses
back below 70. When plotted below the price in a chart, the
RSI could also be used to show a bullish or bearish divergence,
which would be a precursor to a change in trend.
For more information on the RSI, see:
"New Concepts in Technical Trading Systems" by J Welles
Wilder Jr, Trend Research "Technical Analysis of Stocks, Options & Futures"
by William F Eng, Probus Publishing Company
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