Financial analysts use a variety of different tools and metrics to come up with financial forecasts. A case in point is RSI which stands for relative strength index. This is a momentum indicator, and it’s used to compare the magnitude of certain recent gains and stack them against the losses over a predetermined period. The intention is to measure the speed as well as the change of the movements of the price of a security.
An RSI Indicator is used mainly in an attempt to identify oversold as well as overbought conditions when it comes to trading an asset. The indicator is designated to provide you with a relative evaluation of the actual strength of the recent price performance of a security. This is why it is also referred to as a momentum indicator. The values of the indicator range run between 0 to 100.
As we mentioned above, the RSI indicator is a tool which provides you with the relative strength of the security’s performance of its price. However, the amount of time which this is measured for is 14 trading days. Now, when it comes to traditional interpretation as well as the usage of the RSI is when the value is at 70 or above this, the security is becoming overvalued or overbought, and it could be primed for a reversal. This can lead to a corrective and effective pullback when it comes to the price.
However, the other side of the RSI value – when it is at or below 30, this is usually indicating an undervalued or oversold condition. This is usually a signal for a corrective reversal of the price to the upside or a trend change in the same direction, unlike the other reading.
The benefits of RSI indicator are without a doubt considerable. Being a very important measurement tool for financial analysts, the indicator is capable of providing the analyst with insights on the direction of the trend. The RSI, however, is commonly used with trend lines for this particular matter. Furthermore, the trend line resistance or the support coincides with the levels of the support or resistance within the reading of the RSI itself. This could allow analysts to gain insightful knowledge of the movement of the market trend and take advantage of it. It’s a tool which is overly used in a wide range of ways, and it can guarantee different outcomes.