RSI stands for Relative Strength Index, and it is a technical analysis indicator that measures the strength of a security or asset by comparing its recent gains to its recent losses. It was developed by J. Welles Wilder in 1978.
The RSI indicator is usually displayed as an oscillator, which means it fluctuates between 0 and 100. When the RSI is above 70, it is considered overbought, which means that the price may have risen too much too quickly and could be due for a correction. When the RSI is below 30, it is considered oversold, which means that the price may have fallen too much too quickly and could be due for a rebound.
How to use RSI indicator
To use the RSI indicator, traders usually look for divergences between the RSI and the price action. For example, if the price of a stock is making higher highs, but the RSI is making lower highs, this could be a bearish divergence, which could indicate that the stock is losing momentum and may be due for a reversal.
Traders also use the RSI indicator to identify potential entry and exit points. For example, if the RSI is oversold and then crosses above the 30 level, this could be a signal to buy. Similarly, if the RSI is overbought and then crosses below the 70 level, this could be a signal to sell.