A form of technical analysis that serves as a momentum oscillator, measuring the speed and change of price movements.
Relative Strength Index (RSI) refers to an indicator derived from the price momentum of any particular asset. The main factors for the computation of the RSI are the asset’s change in price and the speed with which it happens. Those movements, especially since they can strongly shift from two extremes, are considered oscillations. RSI oscillations are rated between 0-100.
The importance of determining the RSI of a particular asset is to check whether it is either overbought or oversold. Typically, an RSI indicator that reflects more than 70 is considered overbought. When it is oversold, RSI can reflect figures lower than 30. This is used as a signal by traders to identify the trend of an asset’s price, divergences and potential swings.
As already mentioned, RSI is also important for traders trying to identify potential trend reversals and support and resistance levels. This helps traders perform a more comprehensive technical analysis. RSI is applied in determining whether the market is exhibiting either a bearish or bullish divergence.
In a bullish divergence, the RSI gets higher while an asset’s price continues to drop. This reflects that there are more people buying the asset despite the price decreasing.
In a bearish divergence, the price of an asset rises while the RSI drops lower. This reflects that the asset’s price increase is beginning to lose upwards momentum.
The RSI is measured based on the change of an asset’s price between 14 periods, which can either be on a daily or hourly chart basis. To calculate the RSI, the average gain of an asset within the period and its average loss is divided and plotted on the zero to 100 scale.