Relative Strength Index

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Relative Strength Index [Momentum Indicator]


Are we overbought or oversold?
Relative Strength Index (RSI) is a popular momentum oscillator developed by J. Welles Wilder Jr. and detailed in his book New Concepts in Technical Trading Systems.

The Relative Strength Index compares upward movements in closing price to downward movements over a selected period. Wilder originally used a 14 day period, but 7 and 9 days are commonly used to trade the short cycle and 21 or 25 days for the intermediate cycle.

Please note that Wilder does not use the standard moving average formula and the time period may need adjustment.

Relative Strength Index is smoother than the Momentum or Rate of Change oscillators and is not as susceptible to distortion from unusually high or low prices at the start of the window (detailed in Momentum Construction). It is also formulated to fluctuate between 0 and 100, enabling fixed Overbought and Oversold levels. See Construction for further details.

Trading Signals
Different signals are used in trending and ranging markets. The most important signals are
taken from overbought and oversold levels, divergences and failure swings.

Use trailing buy- and sell-stops to time entry into trades.

Ranging Markets
Set the Overbought level at 70 and Oversold at 30.

Go long when RSI falls below the 30 level and rises back above it or on a bullish divergence where the first trough is below 30.
Go short when RSI rises above the 70 level and falls back below it or on a bearish divergence where the first peak is above 70.
Failure swings strengthen other signals.

Trending Markets
Only take signals in the direction of the trend.

Go long, in an up-trend, when RSI falls below 40 and rises back above it.
Go short, in a down-trend, when RSI rises above 60 and falls back below it.
Exit using a trend indicator.

Take profits on divergences. Unless confirmed by a trend indicator, Relative Strength
Index divergences are not strong enough signals to trade in a trending market.

Permission to reproduce material on the Relative Strength Index indicator is conditional upon displaying a hyperlink to http://www.incrediblecharts.com/technical/relative_strength_index.htm on your website.
 
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