Investing 101

RSI is a momentum-drive oscillator that is used in technical analysis to evaluate whether an asset is overbought or oversold.

RSI moves between two values - 0 to 100, typically measured over a 14-day period. Values of 70 or above traditionally indicate that a security is overbought and may face a correction in the price. On the other hand, an RSI of 30 or below indicates an oversold asset with potential for a rise in the price. 

The relative strength index was developed in 1987 by J. Welles Wilder Jr. to provide technical traders with signals about bullish or bearish price momentum. The RSI can typically be found plotted beneath the graph of an asset’s price. 

![RSI](https://storage.googleapis.com/toggle-webcm-prod/https://storage.googleapis.com/toggle-webcm-prod/Screenshot_2024_02_15_at_12_14_26_PM_10e34791ac/Screenshot_2024_02_15_at_12_14_26_PM_10e34791ac.png)

**How does the indicator work?**

Traditionally, an asset with an RSI greater than 70 is considered overbought and less than 30 is considered oversold. However, these traditional levels can be adjusted to better fit an asset. 

For example, if an asset’s RSI is repeatedly touching 70, then you might have to adjust the “overbought” level to 80. Additionally, during times of strong trends, the RSI may remain in an overbought or oversold area for an extended period of time.

Similar to prices, the relative strength index also has support and resistance levels. In a bull market, the RSI of assets tend to remain in the 40-90 range and 40-50 acts as a supporting level - that means if the RSI breaks that level, we could see a switch to a bear market. 

During a bear market, the RSI tends to stay between the 10-60 range and 50-60 acts as a resistance level - thus if crossed, we could see the start of an uptrend. 

These levels vary depending on the strength of an asset or the market’s underlying trend. 

If the underlying asset’s price makes a new high or low that is not confirmed by the RSI, this signals a price reversal. For example, if the RSI makes a lower high and then follows with a downside move below a previous low, a Top Swing Failure has occurred. On the other hand, if the RSI makes a higher low and follows with an upside move above a previous low, a Bottom Swing Failure has occured. 

**Formula**

RSI = 100 - [100 / (1 + (Average Upward Price Change/ Average Downward Price Change))]


This simple indicator is what is called an oscillator, meaning it moves within a range. You can think of it as a spring that can be compressed and expanded within certain limits. 

Relative Strength Index (a.k.a. RSI)

Technical Indicators 

Volume is a measure of trading activity - how many shares of a given financial asset has traded in a period of time. High trading volume is typically most meaningful when assessed in the context of price. It often means that a rally will continue, or that a sell-off has come to an end and the price is more likely to rise.

Low trading volumes can signal a bottom in price as selling has been exhausted, or that a price rally is running out of steam and a correction could be imminent.

Essentially, the trading volume can help an investor identify momentum, which can help an investor determine their entry and exit points in a position. High momentum = enter, low momentum = exit. 

Average trading volume is a good measure to look at prior to getting into a position to understand the liquidity of the asset - you want to avoid investing in illiquid assets, especially if you hope to exit the position soon. 

One of the methods of identifying trading volume is by observing a price by volume chart, which is a horizontal histogram plotted on a security’s chart, showing you the volume of shares traded at a specific price level. 

Volume Analysis

Relative Strength Index (a.k.a. RSI)