The RSI or relative strength index was created by J. Welles Wilder and is known as a momentum oscillator and is used as a technical indicator for technical analysis of stocks. The RSI charts the current and historical strength or weakness of a stock during a given trading period and is measured from 0 to 100. Most traders usually focus on the numbers 70 and 30. When a stock’s RSI goes over 70 it becomes overbought and a reversal could happen. The same goes for when it goes below 30 and becomes oversold. Sometimes the RSI can reach the extremes of either direction such as 90 and 10. This doesn’t occur often but when it does, it usually indicates stronger momentum.
Remember the RSI measures the recent activity of a given stock. The rate at which the RSI increases or decreases is proportional to the velocity of a change in the trend of the stock.
Andrew Cardwell developed new interpretations of the RSI to determine and confirm trends. He noticed that uptrends and downtrends usually traded between set RSI values, with uptrends trading between 40 and 80 and downtrends trading between 60 and 20.
Remember the RSI is just another indicator for traders to use to help them make a decision on whether to trade a stock or not. These indicators are not 100% accurate either and are meant to be used along with due diligence on a given stock to make a decision. Stay tuned in the following days as we take a more in-depth look at other trading indicators.
