(RSI)

a description

The Relative Strength Index (RSI), developed by J. Wells Wilder, is a momentum oscillator that measures the speed and change of price movements. The RSI oscillates between zero and 100. Traditionally, the RSI is considered overbought when it is above 70 and oversold when it is below 30. Signals can be generated by looking for divergences and failure swings. The RSI can also be used to determine the overall trend.

  • The RSI is considered overbought when it is above 70 and oversold when it is below 30. These traditional levels can also be adjusted if necessary to better suit the security. For example, if a security is repeatedly hitting an overbought level of 70, you may want to adjust that level to 80.

    Note: During strong trends, the RSI may remain in the overbought or oversold zone for extended periods.

  • The RSI also often forms chart patterns that may not be seen on the underlying price chart, such as double tops and bottoms and trend lines. Also look for support or resistance on the RSI.

  • In a bull market or a rising market, the RSI tends to stay in the 40 to 90 range with the 40-50 area acting as support. During a bear market or a falling market, the RSI tends to stay in the 10 to 60 range with the 50-60 area acting as resistance. These ranges will vary depending on the RSI settings and the strength of the underlying trend of the security or market.

  • If the underlying prices make a new high or low that is not confirmed by the RSI, this divergence may indicate a price reversal. If the RSI makes a lower high and is followed by a downward move below a previous low, an upper swing failure has occurred. If the RSI makes a higher low and is followed by an upward move above a previous high, a lower swing failure has occurred.

The RSI is a fairly simple formula, but it is difficult to explain without pages of examples. See Wilder's book for additional calculation information. The basic formula is:

Relative Strength Index = 100 – [100 / ( 1 + ( Average Upward Price Change / Average Downward Price Change )) ]