Relative Strength Index

From Traderpedia

An indicator designed by J. Welles Wilder and first published in his book 'New Concepts in Technical Trading Systems'

RSI is an extremely useful, reliable indicator which is a favourite of many traders.

[edit] Calculation

The RSI is generally calculated using a 14 day time period (and this is generally the default setting of many trading software packages) however other time periods can be used such a 9 day for a faster setting and 25 day for a slower setting.

The RSI is calculated by taking a number of days (N) say 14 days and using the equation.

<math>RSI(N) = 100-\left[ \frac{100}{\left(1+p\right)} \right]</math>

where p = (the average gain of N days /average loss of N days)

[edit] Application

In general terms the RSI is an overbought/oversold indicator. In practice below 30 is considered being an oversold indication and when the RSI crosses 30 to go up, this is a buy signal. At the other end of the scale a value above 70 is considered overbought and when the RSI crosses to go below this, it gives a sell signal.

It should be noted that the RSI will form chart patterns similar to those found on the main chart, such as a double top, head and shoulders etc which may not show up in the stock/indices price, but which will give and an indication as to pending change ahead.

The RSI will also form support and resistance levels, just like the main chart and it may also diverge from the main chart direction indicating change. For example, the stock/index may make a new high, but the RSI doesn't - that's a bearish indicator. Conversely the stock/index may make a drop to a new low but the RSI moves sideways or upwards - that's a bullish indication. In these cases the price will ususally follow the direction the RSI has just shown.