Calculation
The RSI is a fairly simple formula, but is difficult
to explain without pages of examples. Refer to Wilder's book
for additional calculation information.
The basic formula is:
RSI = 100 - --------1001 + RS
RS = Average Gain / Average Loss
Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
First Average Gain = Total of Gains during past 14 periods / 14
Average Loss = [(previous Average Loss) x 13 + current Loss] / 14
First Average Loss = Total of Losses during past 14 periods / 14
Note: "Losses" are reported as positive values.
Below you can find an spreadsheet to calculate RSI manually
Files:
rsi.zip 3 kb
.
105129
RSI indicator
We are continuing discussion about the indicators.
We have the following thread:
Parabolic SAR indicator
Momentum indicator
Stochastic Oscillator
Divergence Indicator
Now we are talking about RSI.
"Technical Analysis from A to Z":
The Relative Strength Index ("RSI") is
a popular oscillator.
It was first introduced by
Welles Wilder in an article
in Commodities (now known as Futures)
Magazine in June, 1978.
Step-by-step instructions on calculating
and interpreting
the RSI are also provided in
Mr. Wilder's book,
New Concepts in Technical
Trading Systems.
The name "Relative Strength Index"
is slightly misleading
as the RSI does not compare
the relative strength of two securities,
but rather the internal strength of
a single security.
A more appropriate name might
be "Internal Strength Index."
Relative strength charts that compare
two market indices,
which are often referred to as
Comparative Relative Strength.
Wilder, J. Welles. New Concepts
in Technical Trading Systems. Greensboro, NC: Trend Research, 1978.[/CODE]
When Wilder introduced the RSI,
he recommended using a 14-day RSI.
Since then, the 9-day and 25-day
RSIs have also gained popularity.
Because you can vary the number
of time periods
in the RSI calculation, I suggest
that you experiment
to find the period that works best for you.
(The fewer days used to calculate the RSI,
the more volatile the indicator.)
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.
In Mr. Wilder's book, he discusses five uses
of the RSI in analyzing commodity charts.
These methods can be applied to other security
types as well.[CODE]Tops and Bottoms.
The RSI 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 (page 215) or triangles (page 216)
that may or may not be visible on the price chart.
Failure Swings.
also known as support or resistance penetrations or breakouts).
This is where the RSI surpasses a previous high (peak) or
falls below a recent low (trough).
Support and Resistance.
The RSI shows, sometimes more clearly than price 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) i
n the RSI. Prices usually correct and move in the direction
of the RSI.
For additional information on the RSI, refer
to Mr. Wilder's book:
on amazon com
for example.
Calculation
The RSI is a fairly simple formula, but is difficult
to explain without pages of examples. Refer to Wilder's book
for additional calculation information.