Relative Strength Index (RSI)

The relative strength index is another technical indicator used to figure out whether something is overbought or oversold.

It is NOT the same as "relative strength". Relative strength is a comparison of price action between two complete different sets of prices. For example, you might measure the relative strength of Apple stock against the S&P 500 market index.

As you'll see below, RSI is based on the price action for only one set of prices. So both Ford and the S&P500 have their own, unique relative strength index.

Chart courtesy of Stockcharts.com

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What is RSI

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The relative strength index (RSI) is a price based indicator that charts historical strength (or weakness) based on closing prices over a set period of time.

Safe Investing Tip:
RSI developed by J. Welles Wilder, and made its first appearance in the June 1978 equivalent of today's Futures Magazine!

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RSI Signals

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Typically, the RSI is measured on a scale from 0 to 100. If you look at the chart, you'll see that "high" and "low" levels are marked at 70 and 30, respectively.

Traditionally, RSI readings above 70 indicate an "overbought" condition. Readings under 30 indicate and "oversold" condition.

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How to Calculate RSI

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RSI = 100 - (100 / (1 + Relative Strength Factor))

The relative strength factor is the average increase in price on up days, divided by the average decrease in price on down days.

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How to Use RSI

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CAREFULLY! As with every technical indicator, the RSI can give you false signals. Since technical analysis the helps your figure out when to buy and sell, it's a good idea to use more than one indicator.

After all, you probably don't buy something without reading several reviews...why should buying and selling assets be any different?