What is RSI? - Relative Strength Index - Fidelity (2024)

FAQs

What is RSI? - Relative Strength Index - Fidelity? ›

The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals. The S&P 500's RSI suggests stocks may be expensive.

First, identify a previous time period to use. A time period is generally 14 days, but can be shorter or longer. Next, add up the average gains and divide by the average losses during your chosen time period. The calculation's solution, or value, is referred to as relative strength.

The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30.

Low RSI levels, below 30, generate buy signals and indicate an oversold or undervalued condition. High RSI levels, above 70, generate sell signals and suggest that a security is overbought or overvalued.

The difference between relative strength and RSI is essentially a difference of perspective. The relative strength tells about the value of a stock in comparison to another stock, index or benchmark, while the RSI tells about the performance of a stock in comparison to the recent performance of the same stock.

With this approach, an RSI in the drop jump greater than 2.5 can be considered excellent whereas an RSI below 1.5 identifies athletes requiring better reactive strength.

Investors using RSI generally stick to a couple of simple rules. First, low RSI levels, typically below 30 (red line), indicate oversold conditions—generating a potential buy signal. Conversely, high RSI levels, typically above 70 (green line), indicate overbought conditions—generating a potential sell signal.

Formula to calculate RSI

The average time period used to calculate RSI for a security is 14 trading days. Let's say a stock was up in 10 of those days and down on the other 4. Then, as the first step to calculate RSI, the average daily gain for those 10 days should be divided by 14.

Limitations of the RSI

Like most technical indicators, its signals are most reliable when they conform to the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock.

Relative Strength Index (RSI): The Relative Strength Index is the average of the number of upward price movements in a period divided by the average of the number of downward price movements.

Should I buy oversold stock? ›

An oversold stock is considered cheaper than it should be and can be a great opportunity to get a favorite stock at a discount price, though the oversold condition is not an automatic buy signal.

One technical indicator that can be used in conjunction with the RSI and helps confirm the validity of RSI indications is another widely-used momentum indicator, the moving average convergence divergence (MACD).

The common levels to pay attention to when trading with the RSI are 70 and 30. An RSI of over 70 is considered overbought. When it is below 30 it is considered oversold. Trading based on RSI indicators is often the starting point when considering a trade, and many traders place alerts at the 70 and 30 marks.

A rising MACD means the overall direction is up. A rising RSI indicates that a new upward move is expected in the direction of the trend, defined by the MACD. When the RSI buy signal occurs when the MACD is in a sell mode, it means that the next upward move is contra trend, thus increasing the risk of the trade.

An RSI can help traders spot entry and exit points and indicate potential price trend reversals. An RSI above 70 suggests a security may be overbought and could be a good candidate for a bearish trade. Likewise, an RSI below 30 suggests a security is oversold and could be a candidate for a bullish trade.

The basic idea behind the RSI is to measure how quickly traders are bidding the price of the security up or down. The RSI plots this result on a scale of 0 to 100. Readings below 30 generally indicate that the stock is oversold, while readings above 70 indicate that it is overbought.

Moving averages (MA)

For example, when the price crosses above a moving average and RSI moves out of oversold territory (above 30), it may signal a potential long entry. Conversely, when the price crosses below the moving average and RSI moves into overbought territory (above 70), it could indicate a short entry point.

RSI oscillates on a scale of zero to 100. It is usually depicted graphically. The formula to calculate RSI is: RSI = 100 – [100 ÷ ( 1 + (Average Gain During Up Periods ÷ Average Loss During Down Periods ))]

Whenever the Volume RSI indicator provides a reading above 50%, it indicates that the market is bullish and signals traders to long the trades. Whenever the volume RSI indicator provides a reading below 50%, it indicates that the market is bearish and signals traders to short the trades.