The relative strength index is a technical indicator used in the analysis of financial markets. This term, which means “Relative Strength Index” in English, is also known by the abbreviated name RSI and the use of the RSI indicator.
What is RSI Indicator?
The RSI indicator, or also known as the relative strength index, is a technical analysis indicator calculated by comparing the closing prices of a stock or any financial instrument in the period determined with the previous closing prices of the base period. RSI values, which are shown as an oscillator, that is, a line chart moving between two extremes, are very important for investors. Because there is a compatibility between the trend line of the RSI chart and the trend line of the price of the financial instrument in the short and medium term. For this reason, it is an indicator that is frequently examined by investors.
Essentially, the RSI, when charted, provides a visual average for tracking both current and historical strengths and weaknesses of a particular stock market. Strength or weakness is based on closing prices over a given trading period, which creates a reliable metric of price and momentum changes. Given the popularity of cash-settled instruments and leveraged financial products; The RSI has proven to be a valid indicator of price movements.
What is RSI (Relative Strength Index) in Technical Analysis and How Is It Used?
J.Welles Wilder Jr. is the person who created the Relative Strength Index. A former navy mechanic, Wilder later continued his career as a mechanical engineer. After several years of trading goods, Wilder focused his efforts on technical analysis studies. In 1978 he published his work New Concepts in Technical Trading Systems. This work also included the release of the new momentum oscillator, the Relative Strength Index, known as the RSI.
Over the years, the RSI has become a very popular concept and is currently seen as one of the main tools used by technical analysts all over the world. In addition, some RSI practitioners have continued to further develop Wilder’s work.
Wilder believed that when prices are rising too quickly and thus the momentum is high enough, the underlying financial instrument, the commodity, should eventually be considered overbought and possibly a sell opportunity. Similarly, when prices are falling rapidly and thus the momentum is low enough, the financial instrument is considered overbought at some point and presents a possible buying opportunity.
There are certain ranges of numbers within the RSI that Wilder finds useful and noteworthy in this regard. According to Wilder, any number above 70 should be considered overbought and any number below 30 should be considered oversold.
An RSI between 30 and 70 is considered neutral and an RSI around 50 means “no trend”.
Some traders believe that Wilder’s oversold ranges are too wide and he chose to change them. For example, someone might consider any number above 80 to be overbought and anything below 20 to be oversold. This is entirely at the discretion of the investors.
What Happens If RSI Drops Below 30?
Such questions about the RSI value are in the minds of many investors who trade in the financial markets. The generally accepted relative strength index value is between 30 and 70. If the RSI value falls below 30, it is expressed as an oversold region and is interpreted as the trend may move upwards. In other words, this is a “buy signal”.
What Happens If RSI Goes Above 70?
If the RSI value goes above 70, it is expressed as an overbought zone and interpreted as a downward trend, that is, a “sell signal”.
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