Question

When an asset&#x27;s Relative Strength Index (RSI) exceeds 70, what does this mathematically suggest regarding the velocity of recent price changes?

Accepted Answer

The Relative Strength Index, or RSI, is a momentum oscillator that measures the speed and change of price movements on a scale from zero to one hundred. When the RSI value exceeds 70, it mathematically indicates that the velocity of recent price changes has been strongly positive, meaning the asset has experienced a rapid series of upward price moves relative to its downward moves over the chosen period. The formula for RSI calculates the ratio of average gains to average losses over a specified number of time intervals, typically 14. An RSI above 70 occurs when the magnitude of the average gain significantly outweighs the magnitude of the average loss. This suggests that the internal momentum of the price increase has been accelerating, reflecting a high velocity of buying pressure within the analyzed timeframe. Essentially, the indicator identifies that the upward price velocity has reached a level where the asset is mathematically overbought relative to its recent historical price performance.

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When an asset's Relative Strength Index (RSI) exceeds 70, what does this mathematically suggest regarding the velocity of recent price changes?