A momentum oscillator that measures the speed and change of price movements on a scale of 0 to 100. Readings above 70 indicate overbought, below 30 oversold.
Deep Dive
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder. It measures the magnitude of recent price changes to evaluate overbought or oversold conditions on a scale of 0 to 100.
Traditional interpretation considers RSI above 70 as overbought (potential reversal down) and below 30 as oversold (potential reversal up). However, during strong trends, RSI can remain overbought or oversold for extended periods. Some traders adjust these levels to 80/20 for more extreme readings.
One of the most powerful RSI applications is divergence trading. When price makes a new high but RSI makes a lower high, this bearish divergence warns of weakening momentum. Bullish divergence occurs when price makes a new low but RSI makes a higher low.
Why It Matters
RSI helps identify overbought and oversold conditions, signaling potential reversals or continuations.
Related Terms
- Divergence — When price makes new highs or lows but an indicator like RSI fails to confirm, suggesting weakening momentum.
- MACD — Moving Average Convergence Divergence - a trend-following momentum indicator showing the relationship between two moving averages of price.
- Stochastic Oscillator — The Stochastic Oscillator is a momentum indicator that compares a security's closing price to its price range over a given period, helping identify overbought o