Relative strength index

The relative strength index (RSI) is a technical indicator used in the analysis of financial markets. It is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. The indicator should not be confused with relative strength.

The RSI is classified as a momentum oscillator, measuring the velocity and magnitude of price movements. Momentum is the rate of the rise or fall in price. The relative strength RS is given as the ratio of higher closes to lower closes. Concretely, one computes two averages of absolute values of closing price changes, i.e. two sums involving the sizes of candles in a candle chart. The RSI computes momentum as the ratio of higher closes to overall closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.

The RSI is most typically used on a 14-day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Short or longer timeframes are used for alternately shorter or longer outlooks. High and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum.

The relative strength index was developed by J. Welles Wilder and published in a 1978 book, New Concepts in Technical Trading Systems, and in Commodities magazine (now Modern Trader magazine) in the June 1978 issue.^[1] It has become one of the most popular oscillator indices.^[2]

The RSI provides signals that tell investors to buy when the security or currency is oversold and to sell when it is overbought. ^[3]

RSI with recommended parameters and its day-to-day optimization was tested and compared with other strategies in Marek and Šedivá (2017). The testing was randomised in time and companies (e.g., Apple, Exxon Mobil, IBM, Microsoft) and showed that RSI can still produce good results; however, in longer time it is usually overcome by the simple buy-and-hold strategy. ^[4]

^ J. Welles Wilder, New Concepts in Technical Trading Systems, ISBN 0-89459-027-8
^ John J. Murphy (2009). The Visual Investor: How to Spot Market Trends (2nd ed.). John Wiley and Sons. p. 100. ISBN 9780470382059.
^ Deng, S.; Sakurai, A. (2013-03-01). "Foreign Exchange Trading Rules Using a Single Technical Indicator from Multiple Timeframes". 2013 27th International Conference on Advanced Information Networking and Applications Workshops. pp. 207–212. doi:10.1109/WAINA.2013.7. ISBN 978-1-4673-6239-9. S2CID 14825935.
^ Marek, Patrice; Šedivá, Blanka (2017). "Optimization and Testing of RSI". 11th International Scientific Conference on Financial Management of Firms and Financial Institutions.

[wilder-1] J. Welles Wilder, New Concepts in Technical Trading Systems, ISBN 0-89459-027-8

[2] John J. Murphy (2009). The Visual Investor: How to Spot Market Trends (2nd ed.). John Wiley and Sons. p. 100. ISBN 9780470382059.

[3] Deng, S.; Sakurai, A. (2013-03-01). "Foreign Exchange Trading Rules Using a Single Technical Indicator from Multiple Timeframes". 2013 27th International Conference on Advanced Information Networking and Applications Workshops. pp. 207–212. doi:10.1109/WAINA.2013.7. ISBN 978-1-4673-6239-9. S2CID 14825935.

[4] Marek, Patrice; Šedivá, Blanka (2017). "Optimization and Testing of RSI". 11th International Scientific Conference on Financial Management of Firms and Financial Institutions.

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