Relative Strength Index
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The Relative Strength Index (RSI) is a technical analysis oscillator showing price strength by comparing upward and downward close-to-close movements.
Note that the term relative strength also refers to the strength of a security in relation to the overall market or to its sector. For instance XYZ might rise 2% when the rest of the market rises 1%. This is sometimes called relative strength comparative to avoid confusion. It's unrelated to the Relative Strength Index described here.
Developed by J.Welles Wilder t he RSI is popular because it is relatively easy to interpret.
Wilder considered a security overbought if it reached the 70 level, meaning that the speculator should consider selling. Or conversely oversold at the 30 level. The principle is that when there's a high proportion of daily movement in one direction it suggests an extreme, and prices are likely to reverse. Levels 80 and 20 are also used, or may be varied according to market conditions (eg. a bull market may have an upward bias).
Large surges and drops in securities will affect RSI, but it could just be a false buy or sell. The RSI is best used as a complement with other technical analysis indicators.
Ricky Schmidt
February 11, 2007
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