Description
The Relative Strength Index (also known as RSI) is a momentum indicator that was developed by J. Welles Wilder in 1978. It is calculated using the price, and is used as an oscillator showing overbought and oversold levels. The RSI compares the upward price movement to downward price movement over the specified timeframe, and displays the result as a momentum line oscillating between 0 and 100. The RSI is displayed on its own chart, separate from the price bars, and is the lower section in the chart shown above.
Calculation
- Description: The RSI is the ratio of exponential moving averages of the upward (U) and downward (D) price movements, normalized into a value between 0 and 100.
- Calculation:
U = Pn - Pn-1
D = Pn - Pn-1
EMAUP = EMAUn-1 + ((2 / (n + 1)) * (Un - EMAUn-1))
EMADOWN = EMADn-1 + ((2 / (n + 1)) * (Dn - EMADn-1))
RSI = 100 X (EMAUP / (EMAUP + EMADOWN))
Trading Use
The RSI can be used in both ranging and trending markets, and therefore can be used in several different ways. The RSI can be used to identify an overbought level when it is above 70, and an oversold level when it is below 30. The RSI can also be used as a divergence indicator, with entries based upon divergence between the RSI and the price bars.