Relative Strength Index
What is the Relative Strength Index? What does it signify?
The Relative Strength Index, otherwise known as RSI, is a measure of the momentum of a stock. RSI is measured between 0 and 100.
Traditionally, a score of 70< is considered overbought, while a score of 30> is considered oversold. The RSI, however, is not a graph that will indicate when the price will fluctuate. A stocks price may stay above 70 or below 30 for a length of time.
A helpful analogy is to think of the RSI indicator like a remote for a toy helicopter. The lever on the remote goes from 100 to 0, 100 raising the helicopter upwards fast, 50 keeping it at the same height, and 0 bringing it downwards fast. Holding the stick (RSI) up at a value of 100 for days will cause the helicopter (stock price) to increase dramatically, once the stick normalizes back down to 50, the stock will stay at that new higher price.
What purpose does it serve?
RSI allows traders validate trends and reversals, and see the momentum that a stock is currently experiencing. For short term traders, it is often used as a way to signal when to buy and sell. Like all metrics, it is not something to independently rely on.
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