Relative Strength Index
The Relative Strength Index (RSI) is a technical indicator that measures the strength of a stocks by comparing the magnitude of its recent gains to recent losses.
The Relative Strength Index (RSI) compares the magnitude of a stocks recent gains to the magnitude of its recent losses.
RSI Basics
- Technical Indicator that measure the strength of a security by monitoring the changes in closing price
- Compares the magnitude of a stock's recent gain to the magnitude of its recent losses
- Results in a range from 0 to 100
- Requires one parameter - the number of time periods used in the calculation
What is RSI Used For?
- Considered a leading indicator (unlike MACD)
- Used to identify trade setups that are high-confidence
- Used to identify the end of a correction in a longer term trending market:
- Example: Use to identify the end of a short-term correction in a long-term bull trend
- Example: Use to identify the end of a short-term price gain in a long-term bear trend
How to Use RSI
- There are multiple ways to use RSI - look for a trend change
- Look for divergences between RSI and Price (original way of using RSI)
- Look for trendline breaks
- Look for extreme high or low readings - can indicate overbought or oversold
- Use Range Rules (see below)
Range Rules
- Use range rules to identify when in a smaller countertrend or when the larger trend has changed
- Andrew Cardwell's Trade Rules suggest defining bull market support at 50-40
- Andrew Cardwell's Tradeules suggest defining bear market resistance at 50-60
- If in a longer-term bearish trend and the RSI bounces off of 50-60, consider that to be the end of a short-term advance
- if in a longer-term bearish trend and the RSI goes above 50-60, the longer term trend may have turned bullish
Other RSI Tips & Details
- Common setting is to use 14 period average
- Combine with Stochastics for even more confidence
RSI Mechanics
The mathematics are fairly complex - don't do this by hand:
- Calculate the magnitude change between days
- Calculate an average gain and loss for the lookback period
- Calculate a smoothed relative strength based on the daily change and average gains/losses
- Convert the relative strength value into the RSI value
RSI History
- Developed by J. Welles Wilder Jr. (suggested using 14 period average for RSI)
- Andrew Cardwell is credited with popularizing range rules