I will be starting series of technical analysis for those interested in knowing how to read chart can always follow up on my blog from now on.
Today I'll be talking about RSI.
Relative Strength Index (RSI)
RSI Alternative means Possible Buy and Sell Signals and Divergences
The Relative Strength Index (RSI) is one of the more popular technical analysis tools; it is an oscillator that measures current price strength in relation to previous prices. The RSI can be a versatile tool, it might be used to:
Generate potential buy and sell signals
Show overbought and oversold conditions
Confirm price movement
Warn of potential price reversals through divergences
The chart below of eBay (EBAY) shows some potential buy and sell signals:
photo Credit
Relative Strength Index potential buy and sell signals
RSI Potential Buy Signal
A trader might buy when the RSI crosses above the oversold line (30).
RSI Potential Sell Signal
A trader might sell when the RSI crosses below the overbought line (70).
Varying the time period of the Relative Strength Index might increase or decrease the number of buy and sell signals. In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day. Notice how in this example, decreasing the time period made the RSI more volatile, increasing the number of buy and sell signals substantially.
relative strength index comparison of 14 day and 5 day RSI
There is another way a trader might interpret Relative Strength Index buy and sell signals. This, and how to interpret RSI divergences I'll show us in my next blog.
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