RSI

Definition:

The Relative Strength Index or RSI was first introduced in 1978 by J. Welles Wilder in his book New Concepts in Technical Trading Systems. Since that time, the Relative Strength Index has become one of the most popular and widely-used momentum oscillators and forms a key part of many trading systems.

The Relative Strength Index oscillator gives a reading between 0 and 100 and is calculated by comparing the magnitude of a market’s recent price advances to the magnitude of its recent declines. The indicator requires one parameter which is the number of time periods used in the calculation. The most common value for this is 14 time periods, as was recommended by Wilder.

Sample Chart:

Usage:

Perhaps the most common usage of the Relative Strength Index oscillator involves its ability to indicate overbought and oversold levels, with 70 being the minimum overbought level and 30 being the maximum oversold level. If the RSI goes above 30, then it would be a bullish signal and if it dropped below 70, it would indicate a bearish signal.

RSI divergences relative to the market price are also used as a trading signal generator. When the RSI shows a divergence with the underlying instrument, the divergence will often precede a change in the price’s direction.

Another creative way of using the RSI involves looking for chart patterns, trend line breaks or support and resistance points on the RSI graph, just as you would on a price chart.

Finally, a crossover of the RSI’s centerline, which has a standard value of 50, can have a bullish or bearish connotation. In general, readings above 50 indicate that average gains are higher than average losses, while readings below 50 indicate that average gains are smaller than average losses.

Calculation Method:

Define:

• n = the number of the time period bar in question.
• N = the number of time periods in the averaging process.
• U(n,N) = the average number of positive price changes over N time periods at time n.
• D(n,N) = the average number of negative price changes over N time periods at time n.
• RSI(n) = The Relative Strength Index value at time period n.

Calculate:

• RSI(n) = 100 – [ 100 / (1 + U(n,N) / D(n,N) ) ]

Practice RSI Trading

Technical analysis with RSI is a demanding skill that requires practice to master. We recommend that you use a demo account to train yourself for free before applying your skills to real money trading.
Most reputale trading platforms today (for example: GFC Trader, AVA Trader, Meta Trader) feature technical indicator functions which can be applied on real-time charts. You can open a free account, download the trading software and start sharpening your technical analysis skills today!

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