Relative Strength Index (RSI)

July 23, 2014 7:55AM CDT

When talking about the strength of a commodity futures contract there are a few different interpretations, one of which is the Relative Strength Index (RSI). The RSI is a comparison between the days that the contract finishes up against the days it finishes down. This indicator is a big tool in momentum trading.

The RSI ranges from 0 to 100. A commodity price is considered overbought around the 70 level and you should consider selling. This number is not written in stone, in a bull market some believe that 80 is a better level to indicate an overbought price since prices often trade at higher valuations during bull markets. Likewise, if the RSI approaches 30 price it is considered oversold and you should consider buying. Again, make the adjustment to 20 in a bear market.

The shorter number of days used the more volatile the RSI is and the more often it will hit extremes. A longer term RSI is more rolling, fluctuating a lot less. Different commodities and futures contracts have varying threshold levels when it comes to the RSI. Prices in some futures contracts will go as high as 75-80 before dropping back and others have a tough time breaking past 70.

Different commodities futures do different things, so be sure to do your homework first or I recommend you have me assist you with your technical analysis.



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