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Topic: Learning Section
Relative Strength Index (RSI)
| From : Simran at 11:57 AM - Jun 13, 2008 ( ) |
Share it on FacebookWhat it Is:
RSI stands for "relative strength index." The indicator was first developed by renowned technical analyst J. Welles Wilder. It is not to be confused with relative strength, which compares a stock's price performance to that of an overall market average, such as the S&P 500. Instead, RSI analyzes the recent performance of a security in relation to its own price history. RSI is a valuable tool to determine overbought/oversold levels.
How it Works:
There are five major principles of RSI analysis:
1.) When RSI goes above 70 or below 30, it indicates that a stock is overbought or oversold and vulnerable to a trend reversal.
2.) A reversal often occurs after bullish or bearish divergence. Bearish divergence takes place when the stock breaks out to a new high, while RSI makes a lower high. Bullish divergence occurs when a stock makes a fresh new low, while RSI sets a higher low.
3.) An RSI failure swing provides a trading signal. A bearish failure swing occurs when RSI peaks above 70, goes below that level, tests the first peak, fails, and breaks support on the RSI chart. The bullish failure swing is the reverse.
4.) RSI forms patterns, such as triangles or head and shoulders tops and bottoms. Breakouts from these patterns on the daily chart often precede the price breakout by one or two days -- providing the swing trader valuable advance notice.
These four features of RSI often come together to create a high-probability buy or sell signal. Thus, a stock may go over 70, create bearish divergence, form a descending triangle top, and then complete a failure swing. These signals often predict the signal on the price chart.
RSI stands for "relative strength index." The indicator was first developed by renowned technical analyst J. Welles Wilder. It is not to be confused with relative strength, which compares a stock's price performance to that of an overall market average, such as the S&P 500. Instead, RSI analyzes the recent performance of a security in relation to its own price history. RSI is a valuable tool to determine overbought/oversold levels.
How it Works:
There are five major principles of RSI analysis:
1.) When RSI goes above 70 or below 30, it indicates that a stock is overbought or oversold and vulnerable to a trend reversal.
2.) A reversal often occurs after bullish or bearish divergence. Bearish divergence takes place when the stock breaks out to a new high, while RSI makes a lower high. Bullish divergence occurs when a stock makes a fresh new low, while RSI sets a higher low.
3.) An RSI failure swing provides a trading signal. A bearish failure swing occurs when RSI peaks above 70, goes below that level, tests the first peak, fails, and breaks support on the RSI chart. The bullish failure swing is the reverse.
4.) RSI forms patterns, such as triangles or head and shoulders tops and bottoms. Breakouts from these patterns on the daily chart often precede the price breakout by one or two days -- providing the swing trader valuable advance notice.
These four features of RSI often come together to create a high-probability buy or sell signal. Thus, a stock may go over 70, create bearish divergence, form a descending triangle top, and then complete a failure swing. These signals often predict the signal on the price chart.
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