Lesson #36 Familiarizing with Relative Strength Index (RSI)

RSI or the Relative Strength Index is a good identifier of overbought or oversold market conditions. It is very similar to stochastics because the Relative Strength Index is also scaled from 0 to 100.

If you get a reading of 20 and below, this means there is an oversold market condition. RSI readings above the scale of 80 identify overbought conditions.

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By means of RSI

You can use the Relative Strength Index just as you use stochastics. The chart shown above identifies an RSI dropping below 20. It accurately indicated that there is an oversold market condition. The price quickly rebounded after the drop.

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You can also use RSI in order to confirm the emergence of trends. That is why it has become a very popular tool.

To accurately see trends, check the RSI and determine if it is below or above 50. You are seeing an uptrend if the RSI goes above 50. On the other hand, you will see a clear downtrend of the market if the RSI falls below 50.

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The beginning chart only shows that an emerging upward trend is forming. You can avoid a fakeout if you will wait for the RSI to cross above 50. This is a clear confirmation of an upward trend. After the RSI crosses the 50 mark, it shows that an upward trend actually formed.