The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions.
Understanding RSI
RSI is plotted on a scale from 0 to 100, with traditional overbought and oversold levels at 70 and 30 respectively. The indicator compares the magnitude of recent gains to recent losses.
Key RSI Levels
- Overbought: Above 70
- Oversold: Below 30
- Centerline: 50
Trading Strategies Using RSI
-
Overbought/Oversold Reversals
- Sell when RSI crosses below 70
- Buy when RSI crosses above 30
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Divergence Trading
- Bullish divergence: Price makes lower lows while RSI makes higher lows
- Bearish divergence: Price makes higher highs while RSI makes lower highs
-
Centerline Crossovers
- Buy when RSI crosses above 50
- Sell when RSI crosses below 50