R.S.I. Relative Strength Index
How is the calculated and why is this an important measurement tool
Thanks TH
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Rob
Best Answer
119 points
AlaaEldin answered 2 years ago …
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:
RSI = 100 - 100/(1+RS) , where RS = Av. of n days' up closes / Av. of n days' down closes
By difinition the RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
Answers
196 points
TeekaTiwari answered 2 years ago …
RSI has already been defined well enough above, so I'd like to add a little commentary on it as a trading tool. The RSI is an important trading tool as it can give you an early tip off to short term trading tops and bottoms. Readings above 80 generally correspond to an over bought condition developing and readings at 20 or below usually correlate to an oversold condition.
The RSI Index (in my opinion) should not be used as a dedicated trading tool. It can sometimes stay on the overbought side of the line for many months leading to false shorting signals. Rather it should be relied upon as a confirming tool. That is I would place more weight on the RSI reading if my other trading indicators are also aligned with it.
