Relative Strength Index
Relative Strength Index, or RSI, is similar
to stochastics in that it identifies overbought and oversold conditions in the
market. It is also scaled from 0 to 100. Typically,
readings below 30 indicate oversold, while readings over 70 indicate overbought.
Using RSI
RSI can be used just like stochastics. From the chart
above you can see that when RSI dropped below 30, it correctly
identified an oversold market. After the drop, the price
quickly shot back up.
RSI is a very popular tool
because it can also be used to confirm trend formations.
If you think a trend is forming, take a quick look at the RSI
and look at whether it is above or below 50. If you are
looking at a possible uptrend, then make sure the RSI is above
50. If you are looking at a possible downtrend, then
make sure the RSI is below
50.
In the beginning of the chart
above, we can see that a possible uptrend was forming.
To avoid fakeouts, we can wait for RSI to cross above 50 to
confirm our trend. Sure enough, as RSI passes above 50,
it is a good confirmation that an uptrend has actually
formed.
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