What Is RSI â€“ The Relative Strength Index
There are many indicators that help investors and market analysts make crucial decisions, and the RSI or the Relative Strength Index is among the more popular ones. RSI is the brainchild of J. Welles Wilder who introduced it in the Futures Magazine, which was known as the Commodities Magazine way back in June 1978.
As the name suggests, the Relative Strength Index aims to find out the relative strength or lack of it of a particular stock in respect to the market conditions.
What Is The RSI?
The price of stocks in the market always keeps changing, or oscillating, and these oscillations are taken into consideration to determine the RSI. These oscillations are graded according to an index that ranges between 0 and 100. The gradation is dependent on the gains and losses of the stock in question in recent times, and once the stock has been placed somewhere on the 0 to 100 index, investors can determine whether the stock has been oversold or overbought. If it is found that the reading is more than 70, then the stock is overbought. However if it is under 30, then the stock is oversold.
How Does The Relative Strength Index Work For An Investor?
Once the stock has been indexed and it is found to be above 30, then the stock is deemed bullish. This means that given its price in the stock market, it can be purchased at the current level. However, if the RSI goes below 70, then it is a clear sign that the investor should sell the stock off as soon as possible. If the RSI goes below 30 and then climbs again to above 30, it becomes a good point for the investors to become interested and purchase the stock. However investors are also advised here to take a look at some other buying signals before they can make a final call.
For a stock, its overbought position can happen when the price has gone up substantially in a short time. On the other hand, when the price comes down rapidly, it can soon enter the oversold category. According to J. Welles Wilder, investors need to watch out for these sudden and sharp oscillations in price, because a reversal is bound to happen soon.
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