Education / Indicators / Relative Strength Index

The Relative Strength Index was first introduced by Welles Wilder in June, 1978. RSI is a technical analysis oscillator showing price strength by comparing upward and downward close-to-close movements.

RSI can be calculated for diferent time frames. The choice of the time frame depends on the level of smoothing you want to recieve. In general, the fewer days used to calculate the RSI, the more volatile is the indicator. Because you can vary the number of time periods in the RSI calculation, you can experiment to find the period that works best for you.

The RSI is a price-following oscillator that ranges between 0 and 100. 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. When the RSI 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.

Calculation

For each day an upward change U or downward change D amount is calculated. On an up day, ie. today's close higher than yesterday's,

U = closetoday - closeyesterday
D = 0

Or conversely on a down day (notice D is a positive number),

U = 0
D = closeyesterday - closetoday

If today's close is the same as yesterday's, both U and D are zero. An average U is calculated with an exponential moving average using a given N-days smoothing factor, and likewise for D. The ratio of those averages is the Relative Strength,



This is converted to a Relative Strength Index between 0 and 100,