What is the RSI indicator?
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 indicators 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. A professional trader might use this indicator alongside other indicators which they feel comfortable with in order to determine if a stock is a good buy or not. Other Oscillators Here are a list of other oscillators used to determine how a stock will move in the future. Balance of Market Power – This indicator gives a trader an idea of how who is in charge in a given stock (the bulls or the bears). Bollinger Bands - These bands can be used as support and resistance. Average True Range - This indicator is used to measure volatility.
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