Momentum indicators: a timely warning
So far, we've only talked about techniques based on trends. They are extremely useful, but most of the time, they identify a change in trend after it has already happen. An early warning about exhaustion of the current trend can be obtained with rate-of-change or momentum indicators. The most commonly used one is the Relative Strength Indicator (RSI). To calculate it, you need to find an AverageGain and Average Loss during a certain period, typically 9 or 14days, take a ratio of them
RS = Average Gain 
Average Loss
and then calculate
RSI = 100 _100 1 + RS)
So, if losses and gains are equal, the RSI is equal to 50, if no gains have occurred during the period, RSI is 0, or if the gains are overwhelming it tends to 100. The rule of thumb is that if RSI reaches 70, the RSI is overbought and the trend will shortly change downwards. This is a high probability sell signal. On contrary, RSI level of 30 indicates an oversold condition and the trend is expected to change upwards shortly. This could be a good opportunity to buy. However, I advise you not to take decisions based solely based on a single indicator, in particular, RSI. Always combine it with Trend analysis.
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