RELATIVE STRENGTH INDEX (RSI)
Back to GlossaryDefinition
A momentum oscillator (0–100) measuring the speed of price changes to flag overbought/oversold conditions.
Summary
The Relative Strength Index (RSI) is a technical analysis tool that helps traders identify when a stock or asset might be overvalued (overbought) or undervalued (oversold). Think of it as a 'temperature gauge' for price momentum - it measures how fast and how much prices have been rising or falling recently. The RSI scale goes from 0 to 100, where readings above 70 typically suggest an asset is overbought (potentially due for a price drop), and readings below 30 suggest it's oversold (potentially due for a price increase). It's calculated by comparing recent gains to recent losses over a specific time period, usually 14 days.
Usage Context
Understanding RSI is crucial when learning technical analysis, risk management, and timing entry/exit points in trading strategies. It's particularly important when studying momentum-based trading systems and market psychology concepts.
Common Confusions
- Thinking RSI provides buy/sell signals on its own - it should be used with other indicators
- Assuming overbought always means immediate price decline - markets can stay overbought longer than expected
- Confusing RSI with relative strength comparison between two securities
- Not understanding that RSI can remain at extreme levels during strong trends
- Misinterpreting RSI divergences as guaranteed reversal signals
