RSI (Relative Strength Index)
Technical IndicatorsQuick Definition
A momentum oscillator that measures the speed and magnitude of price changes, ranging from 0 to 100.
Detailed Explanation
The Relative Strength Index (RSI) is a popular momentum indicator developed by J. Welles Wilder. It oscillates between 0 and 100, measuring whether a security is overbought or oversold. Traditionally, RSI values above 70 indicate overbought conditions (potential sell signal), while values below 30 suggest oversold conditions (potential buy signal). However, in strong trends, RSI can remain overbought or oversold for extended periods. Traders also look for divergences between RSI and price action, which can signal potential reversals. The standard setting uses a 14-period calculation, but this can be adjusted for different timeframes and trading styles.
Real Trading Example
If a stock's RSI rises above 70 while forming a bearish divergence (price makes new highs but RSI doesn't), it might signal an upcoming pullback.