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I often look at different bits and pieces of information for shares, and I know that a common indicator is the RSI (Relative Strength Index), where I believe it's considered overbought when it goes over 70, and oversold when it goes below 30.

However, I'm a bit curious about how to properly consider the RSI with regards to time period, as, for example, a stock could appear oversold when looking at a period of three months, but not oversold over a shorter period of time. Similar observations are obviously true for some other metrics as well, but I'm especially interested in understanding RSI.

So, how would I know if it actually is oversold or is not, as at this moment in time?

Any suggestions appreciated.

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Well that will depend on the time frame you are looking at it. You can't compare the RSI on a five minute chart to the RSI on a daily chart.

The minute chart would represent the momentum of very small trends whilst the daily chart would represent the momentum of much larger trends. On the daily chart the shares might be experiencing a strong uptrend with a rising RSI. During each day the price might move up at the open then come down some, then back up a bit more and repeat this several times during the day before closing higher. During the day the RSI might have moved slightly higher.

But during a single day on the 5 minute chart the price may have gone through several up and down trends, with the RSI going into oversold and overbought several times.

What you should be looking at to strengthen the signal from the RSI is to watch for when the RSI is in the overbought at the same time the price is reaching a peak, or when the RSI is in the oversold at the same time the price is reaching a trout. These could represent potential turning points in price.

The time frame to use would depend on the type of trading you are attempting to undertake. If you prefer day trading (being in and out of a trade in minutes to hours) you might look at time frames of minutes to hours. If you prefer longer term position, trend or swing trading you would probably stick to daily charts. If you prefer longer term active investing you might stick to a combination of daily, weekly and monthly charts.

  • Okay, thank you for your response. I understand what you're saying, which I guess mostly makes sense to me. I suppose, as the acronym implies, it is "relative" strength. I guess I was hoping for some answer that explains how RSI, at some exact point, explicitly determines a stock is oversold/bought. – Cheddar Oct 23 '17 at 13:30
  • As per my answer you would check what the price is doing when the RSI is in overbought or oversold. If price has reached a peak and is starting to show signs of weakness (days where the price closes lower than the open) when the RSI is in overbought - this is a sign that the momentum of the uptrend is running out and that prices might retract for a few day. The same thing goes when the RSI is in oversold, except in revers. – Victor Oct 24 '17 at 9:34
  • For some reason that comment I understand more easily. Yeah, I get it. Thanks. – Cheddar Oct 24 '17 at 11:55

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