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Relative Strength Index

RSI is basically a more advanced version of the basic momentum indicator. RSI addresses the problem of sharp indicator moves that are caused when the last data point is dropped or a new one added. For example, a sharp advance or decline 14 days ago will cause sudden shifts in the momentum line (for a 14 day momentum indicator) even if current prices are moving very little. RSI smooths out the momentum by introducing its own variable into the equation - RS.


RSI = 100 - (100 / (1 + RS))

RS = average of x days' up closes / average of x days' down closes (x is typically 14)

The indicator also indexes its values between 0 and 100, thereby giving a ceiling and floor (overbought and oversold) for the indicator values.

14 is the most popular parameter to use and is what Wilder recommends. A short parameter is more sensitive, giving the oscillator wider amplitude. Short term traders may use 9 instead of 14. Longer term traders want a smoother signal and might use 21 or 28.

Buy signals are typically taken when the indicator increases from below 30 (below 30 is considered oversold) and sell signals when the indicator decreases from above 70 (over 70 is considered overbought). Additionally, some use the midpoint of 50 in order to determine their bias. A reading above 50 indicates a bullish bias and below 50 a bearish one.

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