Relative Strength Index (RSI)

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.

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