One of the most popular technical analysis indicators, the Relative Strength Index (RSI) is an oscillator that measures current price strength in relation to previous prices. The RSI is a versatile tool, it can be used to:
- Generate buy and sell signals
- Show overbought and oversold conditions
- Confirm price movement
- Warn of potential price reversals through divergences
The chart below of eBay (EBAY) shows how the RSI can generate easy to follow buy and sell signals:
RSI Buy Signal
Buy when the RSI crosses above the oversold line (30).
RSI Sell Signal
Sell when the RSI crosses below the overbought line (70).
Varying the time period of the Relative Strength Index can increase or decrease the number of buy and sell signals. In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day. Notice how decreasing the time period made the RSI more volatile, increasing the number of buy and sell signals substantially.
There is another way the Relative Strength Index gives buy and sell signals. This, and how to interpret RSI divergences, all contained on the next page.
