What Does RSI Mean in Stocks Trading?

  • July 31, 2018

What does rsi mean in stocks? Watch our video below to find out.

What does RSI mean in stocks? This is a question new traders may find themselves asking as they learn about different technical indicators. RSI is a popular indicator that shows extreme overbought and oversold levels. We teach why this is important and show you how to use this indicator in our video below.

What does RSI mean in stocks? RSI is another tool that's apart of technical analysis basics. The tools are there to make you a successful trader. The foundation of the stock market is the fight between buyers and sellers.

In fact, without this battle there would be no market and no trading. Technical indicators such as the RSI are here to give traders understanding of price movement as well as when to buy and sell.

What Does RSI Mean in Stocks?

  • What does RSI mean in stocks? In essence, it measures change in price and speed of a stock. In other words, it tells you when a stock is oversold or overbought.

RSI also known as Relative Strength Index is a momentum indicator. Per Investopedia, the RSI was developed by a noted technical analyst Welles Wilder. It compares the volume of recent gains with the losses over a specified period of time.

When a stock is oversold, that means price has fallen drastically and the bears have been in control. When a stock is overbought then price is overextended. The bulls have had control.

These two extremes will correct themselves so depending on where RSI is, price will move up or down. It's important to remember that you shouldn't buy a stock based off RSI alone. Other indicators need to be used to confirm any price movements.

The reason for this is big price movements can cause RSI fake outs. Especially for traders who use RSI as a primary buy/sell indicator.

What does RSI mean in stocks? RSI is another tool that's apart of technical analysis basics. The tools are there to make you a successful trader. The foundation of the stock market is the fight between buyers and sellers.

In fact, without this battle there would be no market and no trading. Technical indicators such as the RSI are here to give traders understanding of price movement as well as when to buy and sell.

What Does RSI Mean in Trading

1. Momentum Indicator

RSI also known as Relative Strength Index is a momentum indicator. Per Investopedia, the RSI was developed by a noted technical analyst Welles Wilder. It compares the volume of recent gains with the losses over a specified period of time.

What does RSI mean in stocks? In essence, it measures change in price and speed of a stock. In other words, it tells you when a stock is oversold or overbought.

When a stock is oversold, that means price has fallen drastically and the bears have been in control. When a stock is overbought then price is overextended. The bulls have had control.

These two extremes will correct themselves so depending on where RSI is, price will move up or down. It's important to remember that you shouldn't buy a stock based off RSI alone. Other indicators need to be used to confirm any price movements.

The reason for this is big price movements can cause RSI fake outs. Especially for traders who use RSI as a primary buy/sell indicator.

Because the RSI is such a popular momentum indicator, using it would be to your advantage.

2. Price Movement

What does RSI mean in stocks? Using RSI alone to trade isn't the best way to be successful. Other technical indicators are important as well. These indicators confirm price movement.

It's important to keep you from entering in a fake out. Then you're not left holding the bag waiting for a correction. Look at where price is in accordance to moving average lines as well as RSI.

The simple moving averages along with the VWAP could confirm RSI or show that a fake out is occurring. Those moving averages also provide equilibrium to a stock.

If price is away from the moving averages it's going to naturally want to gravitate back towards it. Look at what RSI says in conjunction with price. See how it all works together? We show show RSI works in our trading rooms each day. Check out our trading service to learn more.

What Is RSI Buy Signal?

1.RSI gives buy and sell signals

2.Oscillator measures current price strength in relation to previous prices

3.It shows a stock this is overbought, which means take profit

4.For a buy signal look for an RSI that is oversold

5.RSI can also be used to show the strength of a trend

1. Overbought, Oversold and the Trend

For anyone who's been trading for awhile and can answer the question what does RSI mean in stocks knows that just because a stock is overbought or oversold doesn't mean it'll correct right away (read Bullish Bears Reviews from our members).

That's were you need to be careful getting in a trade whether longing or shorting. A stock is considered oversold when it gets below 30 on the RSI indicator. It's overbought when it's at 70 or above.

When a stock is trading in the those ranges, also known as overextended, you need to expect a pullback. That doesn't mean it'll happen right away though.

The current trend also has an affect as to when price will pullback to equilibrium. Being able to draw trend lines is important. If price is at the top or bottom of a trend then you know you probably need to wait for a pullback.

The saying "the trend is your friend" is 100% true. Again, it all works together. Need more stock training? Make sure to take our free courses to help you get started.

What Does RSI Mean in Stocks

You can see the chart here for Shake Shack. The RSI has been pretty overextended for over a month. It had good earnings as you can see from the gap up pattern where it continued to trade in the overbought range. It's just now starting to correct itself. You can see on the 5 minute chart that it traded overbought for half the day making a new high before pulling back.

2. Support and Resistance

Support and resistance play an integral part in trading. As a result, what does that have to do with what does RSI mean in stocks? Traders pay the utmost attention to these levels. Because of this, so does RSI.

You'll notice that overbought and oversold areas are a lot of times right at or near support and resistance. Depending on the type of trader you are, you have to pay attention so as not to make a bad trade (bookmark our penny stocks list and stock watch lists pages).

Candlestick real bodies and wicks as well as moving average lines provide support and resistance. Candlestick patterns also form support and resistance. If you see tweezer top patterns or head and shoulders patterns you should know that tweezer tops form at resistance and the neckline break of a head and shoulders comes at key support.

If you don't know how to find support and resistance, you shouldn't be trading. Take our day trading course if you need to learn more about support and resistance. Also, take our swing trading course.

The Bottom Line on What Does RSI Mean in Stocks

What does RSI mean in stocks is how we know when a stock is overextended. While you need to be careful trading in those oversold and overbought areas, it can also be confirmation of the strength of the current trend.

The importance of other indicators coupled with RSI will work together to make you a good trader. Take our free trading courses.

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