Relative Strength Index (RSI)

Relative Strength Index (RSI) is a momentum oscillator which shows price strength by comparing upward movements of Close prices to their downward movements over a selected number of periods.

Formula

RSI is calculated by the formula:

<math> \operatorname{RSI} = \dfrac {RS}{1 + RS} \times 100 </math>

Where RS is calculated in the following way:

<math> \operatorname{RS} = \dfrac {AG}{AL} </math>

where:

<math>\operatorname{AG}</math> is the average gain of Close prices over the RSI periods. Gain satisfies the following condition:

<math> \operatorname {Close_{i}} - \operatorname {Close_{i - 1}} > 0 </math>

<math>\operatorname{AL}</math> is the average loss of Close prices over the RSI periods. Loss satisfies the following condition:

<math> \operatorname {Close_{i}} - \operatorname {Close_{i - 1}} < 0 </math>

Usage

RSI can be used to:

• Generate buy and sell signals;
• Show overbought and oversold conditions;
• Warn of potential price reversals through divergences.

The RSI line moves within a range of 0 and 100. Values above 70 are considered to be in overbought territory and indicate that a reversal in price is possible. Values below 30 are considered oversold and also indicate a possible reversal. The value 50 is the centerline for RSI.

There are three kinds of signals provided by RSI:

1. RSI reaching of either overbought or oversold level and then making a bit of reversal:

   • Falling of RSI below 30 and then rising above 30 can be interpreted as a signal to buy.
   • Rising of RSI above 70 and then falling below 70 can be interpreted as a signal to sell.

2. Divergence between RSI and the price:

   • When the price makes a new Low, and RSI does not fall as low as before, this can be interpreted as a signal to buy.
   • When the price makes a new High, and RSI does not rise as high as before, this can be interpreted as a signal to sell.
     Divergences that occur after reaching of either overbought or oversold levels usually provide more reliable signals. Unless confirmed by a trend indicator, RSI divergences are not strong enough signals to trade in a trending market.

3. Centerline Crossovers

   • When values go above 50, this indicates that average price gains are higher than average losses which may indicate an uptrend. If the price is also rising, this may be interpreted as a signal to buy.
   • When values go below 50, this indicates that average price losses are higher than average gains which may indicate a downtrend. If the price is also falling, this may be interpreted as a signal to sell.
     Unless confirmed by a trend indicator, RSI centerline crossovers are not strong enough signals to trade.

See Also

• Relative Strength Index in wiki
• Relative Strength Index at Stockcharts