What is RSI?
RSI measures momentum - is a stock overbought (too high, due for drop) or oversold (too low, due for bounce)? Ranges from 0-100. Above 70 = overbought. Below 30 = oversold.
Think of it like this
Think of a rubber band. Stretch it too far (RSI > 70) and it wants to snap back. Let it go slack (RSI < 30) and it wants to tighten. RSI measures how stretched the price is.
Formula
RSI = 100 - (100 / (1 + RS))- RS: Average Gain / Average Loss
- Period: Usually 14 days
Why it matters
- Identifies potential reversal points
- Shows momentum strength
- Helps time entries and exits
- Works in trending and ranging markets
What's a good value?
< 30
Oversold
Potentially due for bounce
30-50
Bearish
Downward momentum
50-70
Bullish
Upward momentum
> 70
Overbought
Potentially due for pullback
Real-world example
GameStop RSI hit 95 in January 2021 - extremely overbought, crashed soon after. March 2020 crash: many stocks RSI < 20 - extreme oversold, then rebounded strongly.
Things to watch out for
- Can stay overbought/oversold in strong trends
- False signals in choppy markets
- Use with other indicators for confirmation
- Different timeframes give different readings
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