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Relative Strength Index (RSI)

The Relative Strength Index or RSI is a common stock market timing signal that is easy enough for even novice investors to use.

Compare the ratio of recent gains against recent loss to calculate a number from 0 to 100. Wilder, the inventor of the RSI, suggests using 14 time periods and levels of 30 to 70. A level above 30 is considered bullish or an RSI that falls below 70 is considered bearish.

Keep in mind, RSI is an indicator – not an absolute. If the indicator seems to point to a stock or index being oversold, don’t automatically assume it is time to buy. Even if the indicator is correct it doesn’t provide information about how long the stock will remain oversold. Instead, keep your eye out for divergences or other indicators that the price isn’t tracking in an appropriate manner.

Finally, understand what you are buying and use indicators as methods to inform you of the possibility of a change or shift not as a means unto themselves.

Don’t confuse RSI with RS.

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