The Relative Strength Index (RSI) is a momentum oscillator developed by Welles Wilder. In the RSI, the average gains and average losses over a specific time period (such as 14 days) are divided to calculate the Relative Strength, then normalized into the Relative Strength Index (RSI), which is range bound between 0 and 100. The RSI typically fluctuates between values of 70 and 30, with higher numbers indicating more momentum. According to this indicator, a security with an RSI over 70 (out of 100) can be considered overbought, while a security with an RSI under 30 (out of 100) can be considered oversold.
The RSI indicator is often used in conjunction with moving averages and stochastics readings to formulate a trade idea. If the RSI indicator dips below 30 and the stochastics and moving average indicators also show a potential bullish trend, the trader may consider taking a long position in the security or exploring call options.
Divergences between the RSI and the underlying index or security may indicate a potential reversal point. For example, if the underlying security is trending down and hits a lower low, but the RSI hits a higher low, it can be considered a bullish divergence.
An RSI score below 30 can be interpreted to mean the security in question is oversold. Where a score of 100 would indicate no negative periods and a score of 0 would indicate no gains during any periods, the basic idea is that somewhere in the middle of all that (around 50) would be the "true" value of a security, and large deviations are indicative of overbought or oversold conditions.
Day Trading Idea
The RSI indicator works stochastics and moving averages to generate trade ideas. Moving averages are important components of many technical indicators. A simple moving average determines the average of a range of closing prices for a security or index for a specific period of time. An exponential moving average is a moving average that gives more weight to the most recent data. Simple moving averages are not weighted for time the way that exponential moving averages are, which has the effect of snapping the chart to the most current information, while simple moving averages have lag.
When it is time to sell, day traders can consider buying put options, or consider going long when it is time to buy consider going long. Regardless of strategy, artificial intelligence from Tickeron can help traders find trade ideas, analyze signals to execute advantageous trades, and assist investors with making rational, emotionless, and effective trading decisions.