Relative Strength Index (RSI) is a technical analysis indicator used to measure the speed and magnitude of price movements. It is a popular indicator among traders because it helps gauge price momentum, identify overbought and oversold conditions, and spot potential reversals in the market. In this article, we will discuss what RSI is, how to calculate it, and how to apply it in trading strategies.
What is Relative Strength Index (RSI)?
Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to evaluate overbought or oversold conditions in the price of a security. RSI oscillates between zero and 100, and is seen as overbought when above 70 and oversold when below 30. RSI is primarily used to identify potential reversals in the market, but it can also be used to detect trends and confirm breakouts.
How to Calculate RSI?
RSI is calculated using a simple formula that compares the average gains and losses over a given period. First, calculate the average gains and losses over a given period by adding up the differences between the closing prices of each period. Then, divide the average gains by the average losses. Finally, apply the formula RSI = 100 – (100/(1 + RS)), where RS is the ratio of average gains over average losses.
Applying RSI in Trading Strategies
RSI is a popular indicator among traders because it is easy to interpret and can be used to confirm trading signals. Traders use RSI in various ways, such as spotting potential reversals when the indicator crosses its overbought or oversold levels, or confirming a break in a trend when the indicator crosses its long-term moving average. Additionally, traders can use RSI to identify divergence between the price of a security and the indicator, as well as to spot support or resistance levels.
Finviz: Screening For Oversold Stocks
Using Finviz, we can quickly screen for overvalued or undervaled stocks using the RSI. The steps below can be done with a free account on Finviz.
Sign in to Finviz then click Screener on the top bar. Under the Technical tab, go to the RSI(14) indicator and set it at “Oversold (30)”. I don’t like to set the RSI at 20 or even 10 because if a stock is that oversold, there’s probably a good bearish reason as to why thus it’s more likely to stay oversold or undervalued. Set the Average Volume to “Over 1M”. This will ensure that the stock is liquid enough to trade in/out of.
That’s it! Finviz makes screening for oversold/undervalued stocks a snap. Again, you can use the RSI screener with a free account (ad supported) so sign up to Finviz now and get started.