## What is Relative Strength Index (RSI)?

The Relative Strength Index (RSI) is a technical analysis instrument that is used to assess if an asset or commodity is wildly overvalued or oversold by comparing the extent of rapid price momentum.

## RELATIVE STRENGTH INDEX- RSI:

• It is one of the most common and popular oscillators of momentum.
• It was developed in the year 1978 by J. Welles Wilder Jr. in his book named as ‘New concepts in Trading system’.
• The velocity and magnitude of a security's price changes are measured by a momentum oscillator and hence, they are its main components.
• They are considered oscillators because they can go to both extremes and show variations.
• These oscillators can be read between 0 to 100.
• This is also generally measured with the period of 14 days.
• The RSI compares the extent of a security's cumulative gains and losses over a fixed time span to draw conclusions about its strength and weakness.
• The RSI primarily shows whether a stock is overbought or oversold in the market.
• When the RSI is above 70%, an asset is considered overbought, and when it is below 30%, it is considered oversold.

## FORMULA OF RSI:

The following formula is used to measure the RSI:

RSI = 100 – {(100 / 1 + RS)}

RS = Average of Upward Price Change/ Average of Downward Price Change.

Here is the formula of above terms to understand the formula even better:

Average of Upward Price Change= {(Past Average Gain) x 13 + Current Gain} ÷ 14

Average of Downward Price Change= {(Past Average Loss) x 13 + Current Loss} ÷ 14

## DENOMINATIONS AS PER THE RSI VALUE:

• RSI value of 50 denotes neutral state.
• RSI value above 50 denotes that the market is bullish, and the assets or securities are overbought.
• RSI value below 50 denotes that the market is bearish, and the assets or securities are oversold.

## BENEFITS OF RELATIVE STRENGTH INDEX:

• RSI may be used to produce trade signals, measure sentiment, or supplement other research methods by traders.
• When used in its traditional application, the RSI is a short- to optimal predictor.
• The charts of RSI can also help you to understand how the securities or asset will perform.
• Situations that are oversold, or underpriced, indicate that a price rise could be on the way.

## LIMITATIONS OF RELATIVE STRENGTH INDEX:

• True reversing alerts are uncommon and distinguishing them from false positives can be complicated.
• While the commodity in question moves in the opposite direction, the RSI indicator will remain in the overbought or oversold level for a long time.

## ROLES OF RELATIVE STRENGTH INDEX:

1. Failure Swing- when the value of RSI falls below 30 then the curve is drawn to understand the market.
1. Application of the trend lines: The RSI provides a more developed signal that price will cross the trend line in the next day or two, in a somewhat precise manner.
1. Pattern breakout: The RSI measures a stock's underlying relative strength over a predetermined amount of time. Such a breakout in the RSI will take place at least 2-3 days ahead of time, and the price will follow suit.
1. Advanced breakout and breakdowns: The RSI provide an early warning, indicating that price will follow the predictor in the following exercises.
1. Role of 50: In the case of the RSI indicator, the mid 50 line serves as a crucial line for determining price path.
Tagged With: relative strength indexRSIBenefits of RSIoscillatorsmomentum
##### Discussion (1)

RSI is widely used in swing trading and in intraday trading. Mostly, beginners can use this indicator in the prediction of a good opportunity to buy or short sell a stock. Majorly, the average length at which is kept at 14. But varies exponentially based on the trade and preference.

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