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Relative Strength Index

Introduction to Relative Strength Index (RSI)

Section titled “Introduction to Relative Strength Index (RSI)”

The Relative Strength Index Technical Indicator (RSI) is a price-following oscillator that ranges between 0 and 100.

Section titled “Recommended Periods for RSI”

When Wilder introduced the Relative Strength Index, he recommended using a 14-period RSI. Since then, the 9-period and 25-period Relative Strength Index indicators have also gained popularity.

Divergence Analysis

Section titled “Divergence Analysis”

A popular method of analyzing the RSI is to look for a divergence in which the security is making a new high, but the RSI is failing to surpass its previous high. This divergence is an indication of an impending reversal.

Failure Swing Confirmation

Section titled “Failure Swing Confirmation”

When the Relative Strength Index then turns down and falls below its most recent trough, it is said to have completed a failure swing. The failure swing is considered a confirmation of the impending reversal.

Signals of Relative Strength Index

Section titled “Signals of Relative Strength Index”

The following signals of Relative Strength Index are used in chart analyzing:

  • Tops and bottoms. The Relative Strength Index usually tops above 70 and bottoms below 30. It usually forms these tops and bottoms before the underlying price chart.
  • Chart formations. The RSI often forms chart patterns such as head and shoulders or triangles that may or may not be visible on the price chart.
  • Failure swing (support or resistance penetrations). This is when the Relative Strength Index surpasses a previous high (peak) or falls below a recent low (trough).
  • Support and resistance levels. The Relative Strength Index shows, sometimes more clearly than prices themselves, levels of support and resistance.
  • Divergences. As discussed above, divergences occur when the price makes a new high (or low) that is not confirmed by a new high (or low) in the Relative Strength Index. Prices usually correct and move in the direction of the RSI.
RSI rises towards 70 during the uptrend and moves back towards the middle when the trend ends.

Calculation of Relative Strength Index

Section titled “Calculation of Relative Strength Index”
RSI = 100 - (100 / (1 + U / D))

Where:

  • U is the average value of positive price changes over the period;
  • D is the average value of negative price changes over the period.