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Chapter 4. The Basics of Technical Analysis > The Relative Strength Index (RSI)

The Relative Strength Index (RSI)

Created by Welles Wilder, the RSI[3] is another measure for overbought/oversold analysis. Using a horizontal 50% mid line most followers of RSI take a buy signal above the mid line and a sell signal below the mid line.

[3] See Welles Wilder (1978).

The RSI measures the internal strength of a single security and does not compare the relative strength of two securities.[4] It is a price-following oscillator that ranges between 0 and 100. Much like the MACD Divergence interpretation, a popular method of analyzing the RSI is to look for a divergence where the security itself is making a new high, but the RSI is failing to exceed its own previous high. This divergence is interpreted as an indication of a likely reversal.

[4] The comparison analysis tool is called the Comparative Relative Strength (or Comparative Strength), which measures one security’s performance against another’s. The Comparative Strength is a useful indicator to compare how, say, a stock is performing compared with its sector or an index or another security within the same industry or sector. Comparative Strength is simply calculated by dividing one security’s price by another’s (the comparison security), thus forming a ratio that forms the basis of the Comparative Strength.


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