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.
T
he
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
W
here 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.
T
he 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.
RSI Indicator - Relative
Strength Index (RSI) Momentum Indicator
