Relative Strength Index

RSI

The relative strength index(RSI) is a price following indicator which is used to identify overbought or oversold conditions in a security. It can be used together with MACD and stochastics to have a more complete and accurate picture of overbought and oversold conditions in a security.

How option traders can make use of the RSI?

The RSI ranges between 0 and 100 on a scale. Usually traders believe that as the RSI reaches levels of less than 30, it is a sign that the price of oversold and bottoming out. If the RSI reaches levels of above 70, it is a sign that the price is topping and is overbought.

When the RSI is not making a new high while the price is making a new high, RSI divergence has occurred and it is a sign that a reversal is imminent. The converse is also true. RSI divergence is an indication that a reversal is imminent.

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