RSI Relative Strength Index
The relative strength index (RSI) is a technical indicator used for the study of financial markets. It is intended to chart the current and historical strength or weakness of the stock or market on the basis of the closing prices of the recent trading period. The indicator should not be confused with its relative strength.
The RSI is classified as an oscillator of momentum, measuring the velocity and magnitude of the directional price movements. Momentum is the rate of price rise or fall. RSI measures momentum as the ratio of higher closes to lower closes: stocks with more or more positive changes have a higher RSI than stocks with more or more negative changes.
The RSI is most commonly used for a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels of 70 and 30, respectively. Shorter or longer timeframes are used for alternatively shorter or longer timeframes. More extreme high and low levels—80 and 20, or 90 and 10—are less frequent but indicate a stronger momentum.
The relative strength index has been developed by J. Welles Wilder was published in the June 1978 issue of New Concepts of Modern Trading Systems and Commodities Magazine (now Futures Magazine). It’s become one of the most common oscillator indices.
The RSI sends signals that warn investors to buy when the asset or currency is over-sold and to sell when it is over-purchased.
Wilder also claimed that the difference between RSI and price action was a very strong indication that a market turning point was imminent. Bearish divergence happens when the price is new high, but the RSI is smaller, thereby failing to affirm. Bullish divergence happens when the current price is low, but the RSI is lower.
Overbought and oversold conditions
Wilder thought that “failure swings” over 70 and below 30 on the RSI were strong indications of market reversals. Assume, for example, that the RSI hits 76, pulls back to 72, then rises to 77. If it dropped below 72, Wilder will find this to be a “failure swing above 70.
Ultimately, Wilder noted that the scale patterns and zones of support and opposition could sometimes be more readily seen on the RSI map than on the price chart. The middle line for the relative strength index is 50, which is often seen as both the support line and the opposition line for the measure.
Uptrends and downtrends
In addition to Wilder’s original RSI interpretation theories, Andrew Cardwell has developed a number of new RSI interpretations to help determine and confirm trends. First, Cardwell noticed that uptrends generally traded between RSI 40 and 80, while downtrends usually traded between RSI 60 and RSI 20. Cardwell found that when securities transition from uptrend to downtrend, and vice versa, the RSI would undergo a range shift.
Finally, Cardwell discovered that there were positive and negative reversals in the RSI. The reverse is the cause of the difference. Of example, a positive reversal happens when the uptrend price correction is lower than the last price correction, while the RSI is lower than the previous correction. A negative reversal occurs when the downtrend rally is smaller than the last downtrend rally, but RSI is higher than the previous rally.