Swing Traders

What does Relative Strength Index - RSI mean?

The RSI is 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:

As you can see from the chart below, 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.

Notice the chart hereunder. When the RSI indicator goes under 30, it signals that AstraZeneca is oversold. When crossing 30 upwards, a nice upward swing can be traded.

When evolving above 70 the RSI signals an overbought situation and crossing that same 70 line downwards is a fine short signal.

The RSI gives very good tradingsignals but these signals are ... rare.

So traders have developped the Dynamic RSI.