The Relative Strength Index (RSI) is a crucial momentum indicator used within the field of technical analysis. It provides insights into the strength and speed of price movements for a financial security.
Specifically, the RSI is designed to measure the velocity and scale of a security's recent price changes. By analyzing these factors, it helps traders and investors understand the internal strength or weakness of price trends and how quickly a price is moving up or down.
The primary indication provided by the RSI is whether a security's price has become overbought or oversold. These conditions suggest that the price may have moved too far in one direction and could be due for a correction or reversal.
- An overbought reading on the RSI typically suggests that the price has increased too rapidly and may be susceptible to a pullback or a decline in the near future.
- An oversold reading, conversely, indicates that the price has fallen too sharply and might be due for a bounce or an increase.
By identifying these potential turning points, the RSI serves as a valuable signal for evaluating market conditions and anticipating future price behavior, helping to inform trading and investment decisions.
