Relative Strength Index

Relative Strength Index

One of the 27 technical indicators offered by OSK188 online charting, the Relative Strength Index is a simple indicator that helps ascertain the best time to make a buy/sell call.The buy decision is made at the change of direction when the average up move is stronger than the average down move over a specific number of days (the other way around marks a sell decision). Hence, for a buy call, the average momentum is ‘relatively’ higher, which explains the term ‘relative strength’.The RSI is generally used to:

  • Generate buy and sell signals
  • Show overbought and oversold conditions
  • Confirm price movement
  • Warn of potential price reversals through divergences

As RSI is an indicator that uses average, it has a normal range between 30% and 70% of the maximum range.

Overbought: When the RSI crosses 70% level, the stock is considered overbought and it’s time to get out. (Sell signal) Oversold: When the RSI is at 30%, the stock is considered oversold, and therefore it’s relatively attractive for traders to come in again. (Buy signal)

The indicator is clear in the chart above, showing a ‘sell’ signal as the RSI crosses below the (70) line, signaling a ‘Sell’. Furthermore, the indicator confirms a ‘buy’ signal as the RSI crosses above the (30) line.

When trends are strong, stocks can remain overbought or oversold for long periods. However, a divergence between the price and the indicator is a warning sign that the price move may be coming to an end.

As with all indicators, the RSI should not be used in isolation but as a confirmation indicator together with other signals.

Proponents of RSI opine that it is fast in signaling an impending price change, thus making RSI a good tool to time profit-taking.