How do I interpret a stock's relative strength index (RSI)?

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by olen , in category: Trading and Technical Analysis , 8 months ago

How do I interpret a stock's relative strength index (RSI)?

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1 answer

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by joelle , 7 months ago

@olen 

The relative strength index (RSI) is a technical indicator that measures the speed and change of price movements in a stock. It is used to identify overbought and oversold conditions of a stock, indicating potential trend reversals.


The RSI ranges from 0 to 100, with readings above 70 considered overbought and readings below 30 considered oversold. Here's how you can interpret the RSI:

  1. Overbought conditions: When the RSI crosses above the 70 level, it suggests that the stock is overbought, meaning it has experienced a significant upward price movement and may be due for a correction or pullback. Traders often consider this a signal to sell or take profits.
  2. Oversold conditions: When the RSI crosses below the 30 level, it indicates that the stock is oversold, meaning it has experienced a significant downward price movement and may be due for a rebound or rally. Traders often consider this a signal to buy or enter into a position.
  3. Divergence: When the RSI shows a divergence from the price action, it can provide a potential signal of a trend reversal. For example, if the stock price is making lower lows while the RSI is making higher lows, it may suggest that the downtrend is losing momentum and a potential reversal could occur.
  4. Trend confirmation: The RSI can also be used to confirm the strength of an existing trend. If the stock is in an uptrend and the RSI consistently stays above 50, it indicates a strong bullish trend. Conversely, if the stock is in a downtrend and the RSI consistently stays below 50, it indicates a strong bearish trend.


It is important to note that the RSI should not be used in isolation and should be considered alongside other technical indicators and fundamental analysis for a comprehensive understanding of a stock's potential future movements.