How can the Relative Strength Index (RSI) be used to identify overbought and oversold condition?
The relative strength index (RSI) is one of the most used charting indicators of overbought or oversold conditions. The momentum of stock price change is measured by the RSI. RSI is a range-bound oscillator, which means that its value changes from 0 to 100 in response to the performance of the underlying security. Its calculation is based on the average gains and losses over the Timeframe.
When the RSI indicator approaches 100, it suggests that the average gains increasingly exceed the average losses over the established time frame. The higher the RSI, the stronger and more protracted the bullish trend. A long and aggressive downtrend, on the other hand, results in an RSI that progressively moves toward zero.
RSI levels of 70 or above are considered overbought, as this indicates an especially long run of successively higher prices. An RSI level of 30 or below is considered oversold.
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