RSI ( Relative Strength Index ) is a technical indicator that measures the magnitude of recent price changes of a commodity ( stock, currency etc ). It determines whether a commodity is overbought or oversold. A commodity is considered overbought when the RSI is over 70 and oversold when the RSI is 30.
You’d want to enter a long ( buy ) position when RSI is below 30 and a short ( sell ) position when RSI is above 70.
But is RSI alone enough for a buy or sell signal?
Let’s take a look at some examples.
The chart above of AAPL ( Apple ) shows it is overbought with an RSI of 76.44. With an RSI above 70, we would want to enter a short ( sell ) position. From the chart, you can see this trade will work in our favor because the price of the stock went from $125.38 to $125.17. This is a $0.21 move in price.
In the example above, RSI was at 28.79 ( below 30 ) so we’d enter a buy ( long ) position. The price of the stock moved from $124.77 to $125.33. This is a move of $0.56.