RSI

The relative strength index (RSI) is a momentum indicator used in technical analysis, and it measures the recent price changes to evaluate if a particular share is overbought or oversold. It's often plotted as an oscillator beneath the graph of a share's price and can have a value from 0 to 100.

How can I use RSI when I invest in stocks?

• You can use it as a buy or sell signal. Usually, values of 70 or above are seen as signs that a security is becoming overvalued and may soon start a trend reversal or corrective pullback in price, potentially indicating a sell signal. An RSI value of 30 or lower indicates an undervalued situation, potentially giving a buy signal.
• While RSI is useful for identifying trend reversals, proper reversal signals are rare and can be challenging to differentiate from false ones. A false positive will be when prices hit above the 30% mark, which would suggest a buy signal but instead of rising, the stock price suddenly declines. A false negative, on the other hand, will be when prices hit below the 70% mark, which would suggest a sell signal but instead of falling, the stock price suddenly rises. Furthermore, prices may stay overbought or oversold for a long time when the stock has significant momentum, like the recent bull run after the March crash, which saw prices kept rising even though it was already overbought a few months ago. Thus, RSI is most useful when analyzing a share that is continuously alternating between bullish and bearish movements.

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