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Relative Strength Index (RSI) Tutorial

RSI stands for Relative Strength Index. It’s a popular tool traders use to measure how strong or weak a stock or other asset is performing. Think of it as a way to check if something is "overbought" (too expensive) or "oversold" (too cheap). 

You can add RSI to the chart by clicking RSI button in the Indicator Panel.


What is RSI?

  • RSI is a momentum indicator that ranges from 0 to 100.
  • It helps traders identify whether an asset is overbought or oversold.
  • The default setting for RSI is 14 periods, which means it looks at the last 14 price movements (e.g., 14 days for daily charts).

How does RSI work?

  1. Overbought (above 70):
  2. If the RSI is above 70, it suggests the asset might be overbought. This means the price has gone up too much, too fast, and could be due for a pullback (price drop).
  3. Oversold (below 30):
  4. If the RSI is below 30, it suggests the asset might be oversold. This means the price has dropped too much, too fast, and could be due for a bounce (price increase).
  5. Middle (around 50):
  6. If the RSI is around 50, it means the asset is in a neutral zone—no strong trend in either direction.

How to use RSI as a newbie trader:

  1. Look for overbought/oversold conditions:
  • If RSI is above 70, consider selling or avoiding buying (price might drop).
  • If RSI is below 30, consider buying or avoiding selling (price might rise).
  1. Watch for divergences:
  • If the price is making higher highs, but the RSI is making lower highs, it could mean the uptrend is losing strength (bearish divergence).
  • If the price is making lower lows, but the RSI is making higher lows, it could mean the downtrend is losing strength (bullish divergence).
  1. Combine with other tools:
  2. RSI works best when used with other indicators or tools, like moving averages or trendlines, to confirm signals.

Example:

  • Let’s say you’re looking at a stock chart, and the RSI is at 75. This means the stock might be overbought, and the price could drop soon.
  • If the RSI is at 25, the stock might be oversold, and the price could bounce back up.

Important Notes:

  • RSI is not perfect! Sometimes an asset can stay overbought or oversold for a long time during strong trends.
  • Always use RSI with other analysis tools to make better trading decisions.

In short, RSI is like a speedometer for price movements—it tells you when things might be going too fast in one direction and could reverse. As a newbie, start by looking for overbought/oversold levels and practice using it on charts!