Relative Strength Index (RSI)
April 10, 2012 Leave a comment
Relative Strength Index (RSI) is technical indicator which is used to detect if the stock price is overbought or oversold. It is calculated based on a period of historical days of gain against loss.
The formula is as follow:
RSI = 100 – 100/(1 + Average Number of Days Gain / Average Number of Days Loss)
Most commonly, the below are the configuration parameters:
Average Number of Days –> 14 days
Overbought zone –> 70 to 100
Oversold zone –> 0 to 30
Neutral zone –> 30 to 70
Trend Reversal or Correction When RSI Signal Overbought or Oversold
Chart courtesy of StockCharts.com
In my opinion, RSI is a powerful indicator when it is used together with other technical indicators such as Moving Averages or MACD. But most importantly, always remember is a absolute MUST to study the fundamental value of the company to gauge the margin of safety.
There is no 100% accurate technical indicators. Technical indicators are the assistant, fundamental analysis is the decision maker.