When Welles Wilder introduced the RSI, he recommended using a 1 4-period look-back when using daily data. The RSI is actually a momentum indicator that follows the price activity of an underlying security. Because of the structure of the fonnula, the RSI value is contained between a minimum value of 0 and a maximum value of 1 00. The RSI fonnula was developed almost 30 years ago. As a result, certain beliefs have developed over the years as to how to best use this versatile -indicator. Welles Wilder described some of these beliefs in his original work and different traders through their collective experience with the indicator have developed other beliefs. There are 9 basic beliefs concerning the best way to use the RSI:
1. Indication of Tops and Bottoms
3. Failure Swings
4. Support and Resistance Levels
5. RSI Chart Fonnations 46
6. Altman Modified – Smoothed RSI
7. Morris Modified RSI
8. Modification of Look Back Period
9. Modification of the Data Source Used
The relative strength index was created by J. Welles Wilder Jr. in the late 1970s; his “New Concepts in Trading Systems” (1978) is now an investment-lit classic. On a chart, RSI assigns stocks a value between 0 and 100. Once these numbers are charted, analysts compare them against other factors, such as the undersold or underbought values. To reach the best evaluation, experts generally chart the RSI on a daily time frame rather than hourly. However, sometimes shorter hourly periods are charted to indicate whether it is a good idea to make a short-term asset purchase.
“The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period.” (Wikipedia).
Investopedia defines: The relative strength index (RSI) is a momentum indicator developed by noted technical analyst Welles Wilder, that compares the magnitude of recent gains and losses over a specified time period to measure speed and change of price movements of a security. It is primarily used to attempt to identify overbought or oversold conditions in the trading of an asset.
The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.
The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.
Traditional interpretation and usage of the RSI are that values of 70 or above indicate that a security is becoming overbought or overvalued and may be primed for a trend reversal or corrective pullback in price. An RSI reading of 30 or below indicates an oversold or undervalued condition.
● The relative strength index (RSI) is a popular momentum oscillator developed in 1978.
● The RSI provides technical traders signals about bullish and bearish price momentum, and it is often plotted beneath the graph of an asset’s price.
● An asset is usually considered overbought when the RSI is above 70% and oversold when it is below 30%.
The RSI provides signals that tell investors to buy when the security or currency is oversold and to sell when it is overbought.
RSI with recommended parameters and its day-to-day optimization was tested and compared with other strategies in Marek and Šedivá (2017). The testing was randomised in time and companies (e.g., Apple, Exxon Mobile, IBM, Microsoft) and showed that RSI can still produce good results; however, in longer time it is usually overcome by the simple buy-and-hold strategy.
● RSI = 100–100 / ( 1 + RS )
● RS = Relative Strength = AvgU / AvgD
● AvgU = average of all up moves in the last N price bars
● AvgD = average of all down moves in the last N price bars
● N = the period of RSI
● There are 3 different commonly used methods for the exact calculation of AvgU and AvgD (see details below)
1. Calculate up moves and down moves (get U and D)
2. Average the up moves and down moves (get AvgU and AvgD)
3. Calculate Relative Strength (get RS)
4. Calculate the Relative Strength Index (get RSI)