Relative Strength Index

A technical indicator developed by Welles Wilder to help investors gauge the current strength of a stock's price relative to its past performance. The usefulness of this indicator is based on the premise that the RSI will usually top out or bottom out before the actual market top or bottom, giving a signal that a reversal or at least a significant reaction in stock price is imminent.

The main purpose of the RSI is to measure the market’s strength and weakness. A high RSI, above 70, suggests an overbought or weakening bull market. Conversely, a low RSI, below 30, implies an oversold market or dying bear market.

But RSI does not indicate a top or a bottom. Sometimes overbought market will be followed by little downward correction in order to gather momentum so it could go up much further. And sometimes oversold market will be followed by little upward correction in order to gather momentum so it could go down much further.




The picture above is an example of implementing RSI on gbp/usd. We can see that the overbought indication is followed by significant downward direction, while the oversold indication is followed by little upward correction go go down much further.


[written by richie]