Terms

Relative Strength Index

Abbreviation
RSI
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
    • If in a longer-term bullish trend and the RSI bounces off of 50-40, consider that to be the end of a short-term decline
    • if in a longer-term bullish trend and the RSI goes below 50-40, the longer term trend may have turned bearish
  • 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:
  1. Calculate the magnitude change between days
  2. Calculate an average gain and loss for the lookback period
  3. Calculate a smoothed relative strength based on the daily change and average gains/losses
  4. Convert the relative strength value into the RSI value

  • Developed by J. Welles Wilder Jr. (suggested using 14 period average for RSI)
  • Andrew Cardwell is credited with popularizing range rules