Relative Strength Index (RSI)

Relative Strength Index (RSI) is a momentum oscillator, developed by J. Welles Wilder, which measures the speed and velocity of price movement of trading instruments (stocks, commodity futures, bonds, forex etc.) over a specified period of time.

The objective of RSI indicator is to measure the change in price momentum. It is a leading indicator and is widely used by Technical Analysts over the globe.

How is RSI calculated? 

The formula for RSI is too complex for traders to manually implement it each time they plan to research a trade. To have a comprehensive knowledge of the concept, we have a simple formula that doesn’t ask for too many technical implications. 

RSI = 100 – [100 / (1 + (Average of Upward Price Change / Average of Downward Price Change)]

How To Use as per HotShot?

RSI near the horizontal line having the value 30 is a bullish signal. In other words, it indicates that the accumulation of sellers in the stock has reached a saturation level, and a trend reversal is on the cards.

RSI near 70 and above is a bearish signal. It indicates the exhaustion of the upward momentum in the stock as the accumulation of buyers has reached a saturation point. 

When the stock is in bullish momentum, the RSI generally stays above 30 and rarely falls below 30. It hits the 70 mark frequently. Likewise, for a stock experiencing bearish momentum, the RSI will rarely hit the 70 mark. It will trade close to 30 and below it.