What is the RSI indicator?

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The RSI indicator is a momentum indicator created by Welle Wilder. Its goal is to take past stock prices and give you buy or sell signals based on those prices.

This oscillator compares the number of gains to the number of losses within a given time frame. This tells you when the stock is overbought and when it is oversold.

The formula is RSI= 100/1+RS, RS= average of the recent up days/Average of the recent down days. This value is computed daily and can be plotted on your chart. Below is an example.

Obviously the oscillator is going to be between 0 and 100 at all times. When the number gets in the upper reversal zone or above 70 the stock is said to be overbought. That means the stock may be heading down. Likewise when the stock is below 30 it is said to be oversold and may be due for a rally.

The other important line to watch on this oscillator is the 50 line. When a stock passes 50 it is said to represent that the trend of that stock is starting to weaken.

This oscillator like all indicatrs has been known to give out many false signals and should be used together with other indicators to determine whether or not you should enter or exit a trade.