Hi everyone - this is matt from mad strats. This video is the second in my stock market. Technical analysis series in this video i'll be covering the relative strength index or rsi. If you're interested in this type of content hit the subscribe button for more the best way to support my work is by sharing this video with a friend.

Alright, let's get started. The relative strength index was first published by this handsome devil in 1978. Wilder presented the computation and explanation for the indicator in the book new concepts and technical trading systems. Since its debut this momentum, oscillator has been an incredibly popular tool for many traders.

So why is this indicator so popular most shaders have the obvious goal of making money. So how does the rsi help you make money to understand the answer to that? We need to have a better knowledge of what rsi truly is the relative strength index functions by comparing bullish and bearish momentum of an assets price? In other words, rsi is a tool that interprets a stock's positive movements relative to its negative movements. Typically, rsi signals are considered to be overbought when the indicator is above 70 and oversold when the indicator is below 30.. The relative strength index is computed with the two following calculations.

Fortunately, for us, most trading platforms have this indicator already coded into their software. The main takeaway from these formulas is that rsi is computed through a comparison of average percent gain versus average percent loss over a certain period. The standard period is 14 trading bars, but you could choose to increase it or decrease it to better complement your trading style. As you can see here, the rsi rises as the number and size of positive closes increase.

Conversely, it falls as the number and size of losses increase values around 100 indicate a very strong positive trend, while values around zero indicate a very strong negative trend. Traders utilize this index by identifying the current trend and looking for a potential continuation or a reversal, because rsi displays momentum oscillation as long as an asset's price movement remains strong, either positive or negative. The indicator can stay in the overbought or oversold zone for long periods of time. Therefore, rsi is best utilized in an oscillating market when the price is bouncing in between bullish and bearish periods.

One way to use rsi involves divergence, a bullish divergence occurs when the rsi creates an oversold reading, followed by a higher load that matches a lower low in price. This indicates rising bullish momentum, which could be a signal of a positive reversal. A bearish divergence occurs when the rsi creates an overbought reading, followed by a lower high that matches a higher high in the price. This indicates rising bearish momentum, which could signal a negative reversal.

It should be noted that rsi does have its limitations. True reversal signs are rare and can be difficult to separate from false alarms. For example, a false positive would be a bullish crossover followed by a sudden decline. A false negative would be a bearish crossover, followed by a quick pop upwards due to the possibility of false alarms, it's common to use rsi with other signals to make trading decisions.

Do you use rsi in your trading? Let me know in the comments below i would love to hear from you thanks for watching and as always may the odds be in your favor.