Talk:Relative strength index

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Contents 1 RSI 1.1 Overbought 1.2 Ranges 1.3 False buy or sell 1.4 Alternative intepretation using reversal patterns

[edit] RSI

The Relative Strength Index (RSI) is a technical analysis indicator that measures the relative gains, over relative losses, over time.

The RSI ranges from 0 to 100, but a security may be considered overbought if it reaches the 70 level, meaning that the speculator should consider selling. When it is a true bull market, an RSI of 80 might be a better level since stocks often trade at higher valuations. Likewise, if the RSI approaches 30, it is a strong buying indicator (20 in a strong bear market).

Large surges and drops in securities will affect the RSI, but it could just be a false buy or sell. The RSI is best used as a complement with other technical analysis indicators.

[edit] Overbought

I am going to let this stay for now, because it is what the amateur investor commonly believes. However, really, overbought is complete nonsense. Just when a strong trend is starting is not the time the speculator should be considering selling. This is when a speculator should look at the strength of the trend and see about buying. There is no such thing as overbought. Prices can always go higher.

As I told you before, stocks are never too high to buy or too low to sell.

—Jesse Lauriston Livermore

[edit] Ranges

The levels 70 – 30 or 80 –20 are purely arbitrary. The RSI indicator like most indictors smoothes out prices so that the analyzer can more clearly see the trend.

Increasing the length of periods RSI encompasses, smoothes out the volatility, shortening it increases it. To make it useful adjust it so that it fills your graph during normal times. During extreme moves the indicator will want to break out of your monitoring window. During these extreme trends the rules for congestion areas do not work. A reading near 100% does not mean the move will not continue. It fact it may indicate just the opposite. Simularaly a reading near zero is not a buying sign.

"When I buy stocks for a rise I like to pay top prices and when I sell I must sell low or not at all.

—Jesse Lauriston Livermore

[edit] False buy or sell

There is also no such thing as a false signal. The RSI signals are correct; it is just the practitioners opinion on what the reading means that may be in error. When the reading is at 70 or above in normal market conditions many poeple assume that the equity is overbought and should be sold or when its at 30 or below the reverse. But this is not true. The readings are subjective to every user. Many equities will actually climb much higher when levels of 70 or above are reached or continue to go much lower when the indicator reads 30 or lower.

[edit] Alternative intepretation using reversal patterns

In his book, Trading for a Living, Alexander Elder suggested looking for reversal patterns in technical indicators such as RSI. This is an interesting variation on the 'magic number' overbought and oversold application. For example, a breakout from a double bottom on the RSI chart will often precede the breakout of a double bottom on the price chart. —Preceding unsigned comment added by 125.27.4.157 (talk) 01:15, 29 April 2008 (UTC)