What Is RSI Indicator?

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Relative strength index or famously known as RSI Indicator is basically a momentum indicator. Momentum is nothing but the rate at which the price changes. For example if stock price is Rs.50 today and it moves to Rs.55 the next day, and Rs.60, the day after. This means the stock has moved about as the momentum is high as the stock price has changed by 30% in just 3 days.

Moreover, if the same 30% change happened over let us say 2 months, than you can assume the momentum is low. In other words, the more swiftly the price changes, the higher is the momentum.

RSI indicator is also a leading indicator, which means it signals the occurrence of a reversal or a new trend in advance. When momentum increases and the price is rising, it indicates that the stock is being actively bought in the market. If momentum increases to the downside, it is a sign that the selling pressure is increasing.

The Relative Strength Index indicator was created by J. Welles Wilder in 1978.  Apart from RSI , there are many other technical tools and resources developed by him like, Parabolic SAR, the Average True Range (ATR), and the Average Directional Index (ADX).

RSI indicator in stock markets is often used to identify price tops and bottoms by focusing on key levels (usually 30, 70 and 80,20) on the RSI chart which is scaled from 0-100. It means RSI oscillates between 0 and 100. RSI indicator shows the internal strength of any stock and also useful in sideways or range based trading sessions.