Relative Strength Index

The relative strength index, or RSI, is an oscillating indicator much like the rate of change indicator except that it operates within a range-bound area between 0 and 100. As the RSI line moves higher, you know the price is enjoying increased strength. As the RSI line moves lower, you know the price is suffering from a lack of strength.

You can choose the time period for the indicator when you plot it on your chart, but keep in mind that the shorter the time period, the more volatile the indicator will be.

When using the RSI, you will want to watch for those times when the line rises above 70 or below 30. When the RSI line is in one of these areas, it indicates the price is overextended and will be prone to reversal or stagnation in the near future. Some of the most opportune times to buy or sell when using the RSI is when you see the line coming out of one of these areas. For example, if the RSI line has dropped below 30 and is turning around to move back above 30—as it was in August on the Citigroup (C) chart—this may be a good time to buy.

Now that you're finished reading the text version of this tutorial, watch the video.

Next tutorial: Slow & Fast Stochastics

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