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RELATIVE STRENGTH INDEX
he Relative Strength Index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of price changes. The RSI is most commonly used to indicate temporary overbought or oversold conditions in a market.
The RSI is displayed as an oscillator on a scale of 0 to 100. A reading of 70 or above is considered to indicate an overbought or overvalued condition, while a reading of 30 or below is considered to indicate an oversold or undervalued condition. However, it is important to note that the RSI is a relative rather than an absolute indicator, and should be used in conjunction with other analysis tools to provide a complete picture of market conditions.
How to trade RSI
There are several strategies that traders can use when it comes to trading with the Relative Strength Index (RSI). Here are a few possible approaches:
1. Overbought/Oversold Conditions: One common way to use the RSI is to look for overbought or oversold conditions on the chart. When the RSI is above 70, it may be indicating that the security is overbought and could potentially be due for a price correction. Conversely, when the RSI is below 30, it may be indicating that the security is oversold and could potentially be due for a price bounce.
2. Divergence: Another way to use the RSI is to look for divergence between the RSI and the underlying security. This can occur when the security is making new highs or lows, but the RSI is failing to confirm the move. This divergence can be an early warning sign of a potential trend reversal.
3. Support and Resistance: Traders can also use the RSI to identify areas of support and resistance on the chart. When the RSI is in overbought territory, it may be finding resistance at those levels, and when it is in oversold territory, it may be finding support.
