Relative strength index
From Free net encyclopedia
The Relative Strength Index (RSI) is a technical analysis oscillator showing price strength. The RSI is popular because it is relatively easy to interpret. It was developed by J. Welles Wilder in his 1978 book New Concepts in Technical Trading Systems.
The RSI is calculated over a given N days. Each close is compared to the previous close and a total U of upward change amounts, and T of both upward and downward changes is formed. For T, the downward changes are added as positive amounts, so it's not just the net change for the period. The formula is then
- <math> RSI = 100 \times {U \over T} </math>
The formula is also written equivalently as follows, with D for the total downward changes. The form with T makes the meaning clearer though.
- <math> RSI = 100 - {100 \over {1 + U/D}} </math>
The RSI ranges from 0 to 100. Wilder considered a security overbought if it reached the 70 level, meaning that the speculator should consider selling. Or oversold if it reaches the 30 level. Levels 80 and 20 are also used, or may be varied according to market conditions (eg. a bull market may have an upward bias).
A period of 14 days was recommended by Wilder. Other periods may be used, as can intervals other than days (eg. hourly, etc).
It will be seen that the principle is that there should be a certain amount of movement both up and down within the N days, and that a disproportionate amount in one direction suggests an extreme, and the likelihood of a reversal.
Large surges and drops in securities will affect RSI, but it could just be a false buy or sell. The RSI is best used as a complement with other technical analysis indicators.
References
- New Concepts in Technical Trading Systems by J. Welles Wilder, ISBN 0894590278
- stockcharts.com on RSIit:Relative Strength Index