Developed by J Welles Wilder, the RSI is considered a momentum oscillator which measures the amount of directional price movements to try and determine if an asset has overbought or oversold conditions. It measures momentum on a scale from 0 to 100 and is most often based around a 14 day time frame. If a shorter time period is used, the RSI movements tend to be more volatile. 70 is typically marked as a ‘high’ level and 30 generally represents a ‘low’ level. Despite it being rare, levels in the 90′s and below the 20′s are sometimes recorded which demonstrates even stronger momentum.
Plotted within a panel above or below the price chart, The RSI indicator can also identify historical price trends and compare them to the current markets strength. However, its key measure is in relation to overbought and oversold conditions as it has the ability to show traders when a security or index is changing direction and reversing. The RSI comprises of a single fluctuating curve, although traders will often add an EMA (exponential moving average) as it will further aid the value of the trading signals. Of all indicators, RSI is considered the leader due to its signs showing that a trend change is about to happen. The only problem is that the RSI is not great with signaling timing which often means that a trader must add a lagging moving average to confirm what the RSI is initially indicating.