Relative Strength Index (RSI)

Type

Momentum Ė closing price relative to previous closing price

History

Developed by J. Welles Wilder in 1978 the RSI is a very popular and extremely useful momentum oscillator.

How does it work?

The RSI is a price following oscillator that compares the magnitude of a stocks recent gains to the stocks recent losses and computes that data into a number that ranges between 0 and 100. It is a strong measure of momentum and itsí construction provides absolute levels of Overbought and Oversold.

The RSI is the indicator shown under the chart. The red line, the RSI, oscillates between 0 and 100. Generally staying between 30 and 70. Wilder recommended using 30 and 70 as the overbought and oversold levels respectively.

Trading Signals

1.      Bullish when RSI falls below the 30 level and rises back above it 
or on a bullish divergence where the first trough is below 30

2.      Bearish when RSI rises above the 70 level and falls back below it 
or on a bearish divergence where the first peak is above 70

Settings

The RSI takes a single parameter, the number of time periods to use in the calculation. The three most popular time periods are the 9-day RSI, 14-day RSI and the 25-day RSI.

Sharechart Default:  14 period

Example

The daily share chart for Millerís Retail Ltd shows the RSI indicator underneath. The RSI is overbought above 70 and oversold below 30.

The setting for the Relative Strength Index (RSI) for the graph above was 14 periods. It can be modified: go to Settings > Indicators > Relative Strength Index (RSI).