The Relative Strength Index, or RSI, is a speed indicator used in technical analysis. The relative strength index measures the speed of a security's recent price change to assess the conditions for an extreme high or low in the security's price. The relative strength index is displayed as an oscillator on a scale from 0 to 100.
Apart from providing information about overbought and oversold securities, the relative strength index also provides information about securities that are ripe for a corrective reversal in prices. The relative strength index provides information about the times when it is appropriate to trade. A relative strength index value above 70 indicates an overbought condition. If it is below 30 or 30, it indicates an oversold condition. The relative strength index is plotted below the asset's price chart.
How Does Relative Strength Index Work?
The relative strength index compares the value of an asset when its price is rising with its value when its price is falling. It then relates the result of the comparison to price movements. The relative strength index helps investors gain insight into assets.
What Is Relative Strength Index Curve Plotting?
After the calculation of the relative strength index, the relative strength index is added below the asset's price chart. The RSI rises as the number and size of bullish days increase. The relative strength index decreases as the number and size of bearish days increase.
Calculating the Relative Strength Index
The technical indicator used to identify overbought and oversold conditions of a financial asset is expressed as the relative strength index (RSI).
The following formula is used for RSI calculation:
RSI = 100- (100/(1+RS))
RS refers to the ratio between the average rise and the average fall and is calculated as follows:
RS = (EMA(Highs) / EMA(Lows))
The EMA is calculated according to a mathematical formula based on historical price data.
A period of 14 days is usually used to calculate the relative strength index, but the period may vary. As a result of the calculations, the relative strength index usually takes a value between 0 and 100. If the RSI is higher than 70, the asset is in overbought conditions. If the RSI is lower than 30, the asset is in oversold conditions.
Why Is Relative Strength Index Important?
- The relative strength index allows traders to predict the price movements of securities.
- RSI can help investors confirm trends and trend reversals.
- RSI provides trading signals for short-term traders.
- RSI is a technical indicator to support trading.
What Is Relative Strength Index Deviation?
The relative strength index deviation occurs when the asset's price moves in the opposite direction of the relative strength index. A bullish deviation occurs when the relative strength index shows an oversold condition. Bullish deviation indicates rising speed. When the relative strength index shows an overbought condition, the price experiences bearish deviation.
What Happens When the Relative Strength Index Is High?
The relative strength index is used to determine whether a financial asset is overbought or oversold. A high relative strength index means that a financial asset is overbought and its price is likely to decline. Therefore, it is considered a signal to sell the financial asset.
What Happens When the Relative Strength Index Is Low?
Some investors take it as a buy signal when the relative strength index of a financial asset falls below 30. This is based on the idea that the financial asset is oversold and therefore ripe for a rebound. However, the reliability of this accepted signal depends on the overall context. If the financial asset is caught in a significant downtrend, it may continue to trade at an oversold level for some time. In this case, investors may hold off buying until they see other technical indicators confirming buy signals.
