Relative Strength index is an indicator of strength and momentum within a business that is used to compare the weight age of recent profits to the weight age of recent losses. These profits and losses are related to an asset and are compared in order to find out the overbought and oversold conditions of an asset. The formula of relative strength index can be shown as follows:-
Relative Strength Index = 100 – 100/(1 + RS)
Where RS can be defined as
Average of number of days up closes/ Average of number of days down closes
As the chart indicates the relative strength index ranges in value from 0 to 100. If the relative strength indicator reaches the value of 70 that means the assets is doomed to be overbought. By as asset being overbought this means that is getting overvalued and it must be pulled back to keep the value of the asset within bounds. On the other hand if the value of the relative strength index reaches 50 that means the asset is likely to be oversold and it is becoming undervalued
A business trader must understand RSI completely before selling and purchasing assets as large rise and drop in the price of an asset will generate false RSI that will give fake signals to sell or purchase an asset.
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