Chapter 8: Relative strength index
In chapter 7 I discussed how momentum operates in trading markets causing overshoot or undershoot; that is, overbuying in an uptrend and overselling in a downtrend. I also described the momentum indicator that’s used to track momentum and highlight overbought or oversold conditions. In this chapter I’ll describe another widely used indicator that’s used for essentially the same purpose: the relative strength index (RSI).
A measure of momentum
The relative strength index was developed in 1978 by Welles Wilder Jr. The name relative strength index is really a misnomer because the index is a measure of momentum; it’s not a comparison of the strength of one stock to another stock or index. Like momentum, its purpose ...