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Learn Technical Analysis

 Common Chart Indicators

 Bollinger Bands

 MACD

 Parabolic SAR

 Stochastics

 RSI

 Elliot Wave Theory

 

 

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.