Relative Strength

Relative strength is the measure of price trend that indicates how stock is performing in relation to other stocks in the same industry. In today’s article we discuss the Relative Strength Index (RSI) as it relates to technical analysis .

The RSI is expressed as a percentage and it is calculated by dividing the price performance of a stock by the price performance of an appropriate index for the same time period. The RSI is a very popular momentum oscillator indicator and it compares the degree of recent gains to recent losses in order to determine overbought and oversold conditions of an asset. This indicator is paired with other technical analysis indicators when trading stock .

When measuring stocks using the RSI traders must be aware that big surges and/or drops in the price of an asset will affect the RSI by creating false buy or sell signals. Below we discuss legitimate situations in which stocks appear to be overbought or oversold when using the RSI.

When a price of a security rises to such a degree that the oscillator has reached its upper bound, it indicates that the stock is becoming overvalued and therefore overbought. (This typically occurs when the security price is on high volume) As a result the stock may experience a pullback. Technical analysts often use indicators such as stochastics (oscillators) or the money flow index, in addition to the Relative Strength Index to identify when assets are becoming overvalued and overbought.

When a price of a security falls to such a degree that the oscillator has reached a lower bound, it indicates that the stock is becoming undervalued and therefore oversold. In other words, the price has fallen sharply below the true value of the stock and wise investors quickly see this as a buying opportunity. (This also typically occurs when the security price is on high volume) Technical analysts will also use other technical indicators, in addition to the Relative Strength Index, such as the moving average convergence divergence indicator, and again the stochastics oscillator and the money flow index, in order to determine undervalued and oversold stock.

Please also read about Japanese Candlesticks which is a trading strategy used by some of the world’s most successful traders along with other forms of technical analysis. It is the fastest way for new investors to quickly and accurately read stock charts. Once you are comfortable with the major candlestick signals, expand your expertise by learning the secondary Candlestick Patterns . Combine these with your favorite technical analysis indicators, such as the moving average , and you have the perfect trading arsenal for evaluating stocks, currencies, commodities, or exchange traded funds .

Please continue your technical analysis education and read about trend trading .