Definition:
The Relative Strength Index (RSI) is a technical indicator that compares the magnitude of recent gains to recent losses in a certain period to determine the strength of price action.
For example: When using RSI on a daily timeframe, the indicator calculates the average gains and losses using the last 14 days.
The RSI is calculated by taking the average gain of up periods and dividing it by the average loss of down periods, to create a ratio. The result is then plotted as an oscillator that ranges from 0 to 100.
In the photo below, you can see the RSI 14 Day SMA which is shown by the smooth yellow line that is plotted in the indicator. One can note that the RSI 14 Day SMA rarely ever gets over 80, and when it does, it could be signaling a market top is nearby.
What to watch for:
Overbought and Oversold Levels: An RSI reading above 70 is considered overbought, while an RSI reading below 30 is considered oversold. These levels can indicate that a security's price has become too high or too low, respectively, and may be due for a correction.
Centerline Crossover: A bullish signal is generated when RSI crosses above 50, and a bearish signal is generated when RSI crosses below 50.
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