RSI Indicator - Relative Strength Index (RSI) Momentum Indicator

Relative Strength Index

The relative strength Index (RSI) is a momentum indicator, or oscillator was developed by Welles Wilder to measures the relative internal strength of a security against itself.

The relative strength Index (RSI) was developed by Welles Wilder. It is a momentum indicator, or oscillator, that measures the relative internal strength of a security against itself. This should not be confused with comparative relative strength, which compares the performance of one security to another.

The Relative Strength Index (RSI) Formula

The formula for the Relative Strength Indicator (RSI) is as follows:

RSI = 100 100 / (1 + RS)

RS = average of x days' up closes / average of x days' down closes

Where RS = the average of x days' up closes divided by the average of x days' down closes. The formula aims to overcome two problems involved in the construction of a momentum indicator: (1) erratic movements and (2) the need for a constant trading band for comparison purposes. Erratic movements are caused by sharp alterations in the values, which are dropped off in the calculation.

For example, in a 2O-day rate of change (ROC) indicator, a sharp decline or advance 20 days in the past can cause sudden shifts in the momentum line even if the current price is little changed. The RSI attempts to smooth out such distortions.

The RSI formula not only provides this smoothing characteristic, but also results in an indicator that fluctuates in a constant range between 0 and 100. The default time span recommended by Wilder is 14 days, which he justified on the basis that it was half of the 28-day lunar cycle.

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