RSI
A technical momentum indicator that compares the magnitude of recent gains to recent losses in an attempt to determine overbought and oversold conditions of an asset. It is calculated using the following formula:
| RSI = 100 - | 100 |
| ______ | |
| 1 + RS |
| RS = Average of x days' up closes / Average of x days' down closes |
The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued.
Usage of RSI in trading.
No one indicator can be used as a standalone trading indicator. RSI is especially usefull to confirm conditions in the market. Look at the chart below to see that the RSI can confirm a breakout: