A stock’s Relative Strength Index (RSI) is used to compare a stock’s current price to its previous prices. This can be used to determine if a stock is overbought or oversold, or essentially expensive or cheap. If a stock’s RSI is overbought then it is considered expensive and if a stock’s RSI is oversold then it is considered cheap.
How to Read the RSI
As you can see, whenever the RSI passes below 30, it is considered oversold and when it passes over 70 then it is considered overbought. The RSI indicator can help determine when a stock is good to buy as well as the general direction a stock price is moving compared to its last price. Remember even though a stock’s RSI is under 30, you should not always buy. It is important to look further into other technical indicators to determine if you should execute an order.
The RSI can have trend lines just like candlesticks can. In the case above, it looks like the RSI has a line of resistance at around 70. Trend lines on the RSI can help determine a continuation of price direction, a significant change in price, or a reversal. While drawing trend lines on the RSI is much less common than on candlesticks, it is still utilized by many investors.
How Do I Configure the RSI?
When setting up the RSI indicator, you will first be asked for the period, which is most
commonly 14. Next, you will be asked to enter a field, which is normally set to “close”. Then,
you will be asked to enter the Overbought territory, which is most commonly set to 70.
Finally, you will be asked to enter the Oversold territory, which is most commonly set to 30.