# WHAT IS THE RELATIVE STRENGTH INDEX? DEFINITION, CALCULATION & EXAMPLE

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This guide explains what the relative strength index (RSI) shows traders as a technical analysis indicator. We explore the various functions of an RSI & what kind of insight traders can generate by using it on a chart.

Read on to lớn learn about how to spot potential buy, sell, and exit signals by using the RSI. More, you can learn about RSI divergences and how these can confirm desirable trading positions.

## What Is Relative Strength Index?

The Relative Strength Index (RSI) is one of the more popular technical analysis tools.

It is an oscillator that measures current price strength in relation lớn previous prices.

The RSI can be a versatile tool, it might be used to:

Generate potential buy và sell signalsShow overbought và oversold conditionsConfirm price movementWarn of potential price reversals through divergencesThis eBay (EBAY) chart shows potential buy & sell signals.

## How lớn Spot Buy and Sell Signals With RSI

The relative strength index can be used lớn amplify trading strategies by making more informed decisions on market entry và exit points.

Traders hotline these buy & sell signals.

### How khổng lồ Read Potential Buy Signals With RSI

A trader might buy when the RSI crosses above the oversold line (30).

You can see 6 different points on the example chart below, where the oversold line was crossed for Gold. In this instance, a trader might find it profitable khổng lồ enter the trade.

Please note, this is an example – not a recommendation.

### How khổng lồ Read Potential Sell Signals With RSI

A trader might sell when the RSI crosses below the overbought line (70). Varying the time period of the Relative Strength Index might increase or decrease the number of buy & sell signals.

In the chart below of Gold, two RSI time periods are shown, 14-day (default) and 5-day.

Notice how in this example, decreasing the time period made the RSI more volatile, increasing the number of buy và sell signals substantially.

There is another way a trader might interpret Relative Strength Index buy and sell signals. This, và how khổng lồ interpret RSI divergences, is all contained on the next page.

### Reading Buy & Sell Signals Via Divergence

An alternative way that the Relative Strength Index (RSI) may give buy and sell signals is given below:

A trader might buy when price & the Relative Strength Index are both rising and the RSI crosses above the 50 Line.Similarly, a trader might sell when the price và the RSI are both falling & the RSI crosses below the 50 Line.If you understand how lớn use the RSI indicator and want to find a vmvc.com.vn lớn try it in action, see our vmvc.com.vn guides on precious metals (like gold and silver), energy commodities, và agricultural assets.

An example of this potential methodology for buying and selling based on 50 Line crosses is given below in the chart of Wal-Mart (WMT):

For another method for using the RSI indicator for potential buy and sell signals, see our guide on the Stochastic RSI. This technique combines both the popular Stochastics indicator và the Relative Strength Index.

## RSI Confirmations và Divergences

Another usage for the Relative Strength Index is lớn attempt lớn confirm price moves & attempt lớn forewarn of potential price reversals through RSI Divergences.

The E-mini Nasdaq 100 Futures contract chart above shows the RSI confirming price action, along with a warning of future price reversals.

### What Does Low #1 to Low #2 Show?

The E-mini Nasdaq 100 Futures contract’s price made a substantial move from Low #1 lớn Low #2.

The RSI confirmed this move, which may have helped a trader have confidence in jumping on board the price move higher.

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The break of trendline of the e-mini future was also confirmed by the trendline break of the Relative Strength Index, suggesting that the price move may likely be over.

### What Does Low #3 to lớn Low #4 Show?

A bullish divergence was registered between Low #3 and Low #4. The e-mini Nasdaq 100 future made lower lows, but the RSI failed to lớn confirm this price move, only making equal lows.

A trader might see this RSI divergence & begin taking profits from their short sells.

### What Does High #1 khổng lồ High #2 Show?

A bearish divergence occurred when the e-mini futures contract made a higher high và the RSI made a lower high.

This bearish divergence suggested that prices could shortly be reversing the trend.

A trader might consider reducing their long position, or even completely selling out of their long position.

## Where lớn Start Trading With RSI?

If you are interested in trading using technical analysis, have a look at our đánh giá of these regulated brokers available in to learn which tools they offer:

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CFDs are complex instruments and come with a high risk of losing money rapidly due khổng lồ leverage. **Between 74%-89% of retail investor accounts thua trận money when trading CFDs.** You should consider whether you can afford to lớn take the high risk of losing your money.

## FAQs

### What does relative strength index mean?

The relative strength index (RSI) is an oscillator — reading the RSI of a chart allows you khổng lồ measure the strength và prominence of existing price trends in comparison to previous price trends. The RSI is also used to lớn spot buy & sell signals, divergences, and to determine whether an asset is overbought or oversold.

### Who invented the RSI?

The relative strength index was created by J. Welles Wilder, first published as a technical analysis as part of his book *New Concepts in Technical Trading Systems*. Wilder’s book was published in 1978 in magazines like the Commodities Magazine & the Futures Magazine before becoming one of the most used technical indicators in trading.

### How vày I calculate the relative strength index in excel?

To calculate the RSI in excel, you need a các mục of gains và losses from the past time frame you’re calculating the RSI in relation to. Create 2 excel columns, danh mục the gains in, while the losses in the other. Calculate the average gains & losses for each time point by using this formula: *(Current Value + (Previous Average * (Number of Periods – 1)) / Number of Periods.* to get the relative strength value, divide the average gains by the average losses for each time point.

### What is the relative strength of a stock?

The relative strength index of a stock measures the strength of the stock’s trend in the particular direction it’s going. Since the RSI is calculated by dividing the average gains by the average losses of a stock over a given time period, you can gain insight into the current directional strength of the stock, as well as the likelihood of divergence.

## Further Reading

You can explore more technical analysis tools & guides written by our experts:

Traders looking for guidance on the type of instrument khổng lồ enter a market with can look at our trading guides on CFDs, options, cryptocurrencies, stocks, forex, và bullion.

Familiar with instruments, but don’t know what lớn trade? kiểm tra out some of our vmvc.com.vn guides on precious metals, energy commodities, & agricultural commodities.

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Lawrence Pines is a Princeton University graduate with more than 25 years of experience as an equity và foreign exchange options trader for multinational banks và proprietary trading groups. Mr. Pines has traded on the NYSE, CBOE and Pacific Stock Exchange. In 2011, Mr. Pines started his own consulting firm through which he advises law firms & investment professionals on issues related khổng lồ trading, và derivatives. Lawrence has served as an expert witness in a number of high profile trials in US Federal và international courts.