The Relative Strength Index (RSI)

What is the RSI?

The Relative Strength Index is a measure of the rate of upward or downward change in a single stock, a group of stocks, a currency, or any other financial instrument.  A high RSI indicates that prices have been consistently closing higher and higher over the measurement period (typically the last 14 days).  A low RSI indicates that they have generally been closing lower and lower each day over the measurement period.

Typically, we want to buy when the RSI is or has just been low (under 30) but is starting to rise, i.e. the stock (or market) is at the bottom of a cycle, but is the rate of upward price change is starting to grow.  We also want to sell when the RSI is or has just been high (over 70), but is starting to fall, i.e. the stock (or market) is at the top of a cycle, and the rate of downward price change is starting to grow.  However, these conditions with the RSI are not enough on their own - they need to be used in conjunction with other, confirming indicators (such as Stochastics).

Does it Work?

As you can see from the chart above for the whole of SPX, the RSI does not work perfectly, and following it exactly would have missed a lot of opportunity, e.g. the growth between 2016 and 2018.  However, it does also show that having bought when it turned up from below 30 and sold when it turned down from above 70 would have resulted in a handsome gain.  The following chart shows a good example of where the RSI works with a single stock:

But beware - it is not perfect by any means, and really needs to be used in conjunction with other indicators and good common sense to be useful!  The chart below shows how a stock can decline drastically over time without the RSI providing a clear indication: 

For more Information:

Wikipedia provides a very good, more detailed explanation.

Investopedia has simpler, but less detailed explanation.

TraderHQ has "The Ultimate Guide to the RSI" - a very good, detailed but easy to understand analysis of the RSI and its uses.