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Relative Strength Index (RSI): Identify Levels of Overbought and Oversold Market Conditions
Home Finance Trading / Investing
By: Brian Horowitz Email Article
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The Relative Strength Index (RSI) is a platform based trading indicator that looks at both volume and price momentum when gauging the velocity of a financial instrument. Regardless of being oversold or overbought, any market condition can be analyzed using the Relative Strength Index. This is accomplished by calculating a financial instrument’s momentum of losses and gains during a predetermined period of time (typically 14 days).

Overbought Relative Strength Index Level

The Relative Strength Index level used most frequently on trading platforms to decide on an action based on an overbought reading is 70.

• If a Relative Strength Index reading of 70 or greater occurs, you may want to consider selling the financial instrument in the near future as trader interest might be too great to stay in the trade
• Additionally, if a Relative Strength Index reading of 70 or greater occurs, you may want to consider setting a sell stop order on your online trading platform to either leave a position or enter a short position

Oversold Relative Strength Index Level

The Relative Strength Index level used most frequently on trading platforms to decide on an action based on an oversold reading is 30.

• If a Relative Strength Index reading of 30 or less occurs, you may want to consider buying the financial instrument in the near future as it may be under bought
• If a Relative Strength Index reading of 30 or less occurs, you may want to consider setting an automated trading buy order so that your trading platform can automatically enter you into the position

The Relative Strength Index may be used along other trading indicators. The use of another day trading indicator with the RSI provides traders with an additional layer of clarification that a trade setup may be about to occur. One example of this potential trade setup might be the RSI breaking the 30 threshold along with the financial instrument’s price action trend line breaching the lower Bollinger Band.

Brian Horowitz writes futures and forex trading articles featuring examples of how technical indicators can potentially be used to trade financial markets.

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