what does "RSI" represent in a stock chart?

Answer 1

The relative strength indicator measures the momentum of an individual stock (or any actively and freely traded instrument). The formula is a little hard to explain in a short response on this message board since understanding how it is computed requires showing some example data. However, I assume you are more interested in knowing how to use the indicator since a computer can compute the formula.

Like all momentum indicators, there are a few ways to interpret it:

(1) Using overbought and oversold zones. The 14 period RSI uses 70 for overbought and 30 for oversold (typically). You must increase the distance between the zones if you shorten the number of periods and decrease the distance when you lengthen the number of periods. If you use this method of interpretation, you should wait for the indicator to cross from overbought/oversold back to "normal" before taking action. It pays to know whether the primary movement of the stock is bullish or bearish. It's best to act only on oversold in a bull market and only on overbought in a bear market.

(2) By smoothing the indicator with moving averages. You can use one moving average and look for turning points in the indicator or you can use 2 moving averages of different lengths and use the longer one as a "signal" line and wait for the shorter to cross over the longer. You should filter this method by acting on the signal only when the 2 averages are close to or in overbought or oversold.

(3) By looking for divergences. For instance, it a stock makes a high price in Oct and the RSI is at 90, then corrects backward, and makes a new high in Dec with and RSI of 75, then you have a divergence between the RSI and the price of the security which suggests that the upward movement of the stock is weakening. You need to allow some leeway in the time between the peak on the stock and the peak in the RSI.

(4) By constructing trend lines and looking for patterns in the RSI. This is easier if you use longer period RSI's like 30 or 45 period (day) RSI's.

In all cases, do NOT sell or buy on the RSI alone. Momentum indicators give advance warning of a possible change in trend, but should always be confirmed by an action in the price. This means that the security should have been trending upward or downward already (not just trading in a range).

For instance, if a stock has gone from $20 to $27 over the last 5 weeks and the RSI is at 85, then if the RSI drop below 80 and the stock price drops below its its 25 day (varies by stock) moving average, this would be a good time to close long positions (or hedge by buying a put). However, it doesn't mean you should necessarily go short if you believe that primary trend of the stock is upward since the stock may simply go into a trading range and not depreciate significantly.

There is some subjectivity and intuition in knowing how to act on these types of indicators and there is always risk of loss. Obviously, I take no responsibility for any losses that you incur by using this information.

So, use good money management and protective stop loss orders. Remember that if anyone ever does come up with a formula or indicator that works 100% of the time, then as soon as everyone knows about it, it would become useless due to the "discounting" mechanisms of the market.

Answer 2

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Answer 3

The Relative Strength Index was developed by J. Welles Wilder in the 1980's. Most charting packages included this indicator.

Don't confuse RSI with "relative strength," which measures one stock against a different stock by dividing one by the other. This measurement shows you which stock is stronger relative to another one.

RSI measures the strength of a stock relative to itself, or weakness, on a scale of -100 to +100. Having done this, we say the scale is "normalized."

The problem with momentum indicators, is that they don't work very well in trending markets, showing the market to be overbought or oversold, and a reversal imminent, when the markets can stay overbought for months.

Answer 4

RSI==Relative Strength Index. It is a momentum indicator. it is one of the best tool use by trade to validate enter or exit the stock trade
you can go to www.stockcharts.com on the charts school button, one section dedicated to RSI with live example

Answer 5

Relative strength index is a tool used to try to determine whether or not a stock is overbought or oversold. It utilizes the relative strenth within it's equation. Just watch out for false signals due to outlier performances (huge drops or increases) in price.

I believe the relative strength itself is an indication of momentum, though.