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Relative Strength Index (RSI) 

 

Relative Strength Index Indicator Purpose


Relative Strength Index (RSI) is an oscillator indicator developed by J. Welles Wilder that measures the speed of price changes and evaluates the strength / weakness alerts of price movements. Oscillator RSI fluctuates between 0 and 100. RSI can be used by traders for identifying the general market trends. Normally RSI is considered overbought when the indicator climbs above 70 and oversold when the indicator drops below 30.



Relative Strength Index Indicator Usage


RSI indicator may suggest possible corrections or even trend changes without extreme areas:

  • Crossing the overbought boundary RSI indicates a possible SELL opportunity
  • Crossing the oversold boundary RSI signals a possible BUY opportunity.

Convergence/divergence patterns may indicate possible trend weakness:

  • If the market price goes up to a new high, but the indicator does not, it could be a sign of the uptrend weakness;
  • If the market price falls to a new low, but the indicator does not, probably it considers as a sign of the downtrend weakness.

RSI often figures chart patterns like a head and shoulders or get a triangles form. Sometimes it could be noticeable on the price chart. The RSI is mostly used by day traders and short term investors, but the information provided by this indicator can help all investors.



Relative Strength Index Indicator Calculation


RSI = 100 – 100/(1 + RS)


RS = average gain / average loss


Average gain = [(previous average gain) (n-1) + current average gain] / n


First average gain = total gain in the first n periods / n


Average loss = [(previous average loss) (n-1) + current average loss] / n


First average loss = total losses in the first n periods / n

 

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