Monday, October 19, 2009

Relative Strength Index

The Relative Strength Index (RSI) is designed to measure a market's recent gains vs. its recent losses in an attempt to show the relative strength of a trend. Essentially, the RSI plots a line on a scale from 1 to 100. Generally, most analysts consider the market to be overbought when the RSI reaches above 70 or oversold when it drops below 30.

One of the easiest ways to use the RSI is to identify potential reversal points. In the EUR/USD example above, the RSI moved above the 70 mark on April 5, followed by a long selloff until April 9, when it just touched the 30 mark. The market then reversed again, moving up until April 13, when it again moved the RSI above 70, reversing once more.

As always, no indicator is correct 100 percent of the time. The RSI is best used in conjunction with other forms of technical and/or fundamental analysis to confirm or enhance its findings.

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