Traders Toolbox: Relative Strength Index (RSI)

MarketClub is known for our "Trade Triangle" technology. However, if you have used other technical analysis indicators previously, you can use a combination of the studies and other techniques in conjunction with the "Trade Triangles" to further confirm trends.

Developed by Welles Wilder, the Relative Strength Index (RSI) addresses the two major flaws of momentum – the need to have a constant band against which to compare price movement and the ability to smooth the ebb and flow of price movement.

Sharp up or down movement 10 days ago (in the case of a 10-day momentum line) can cause pronounced shifts in the momentum line even if the current prices are relatively stable, giving false signals. Also, different commodities may have different “overbought” and “oversold” levels. RSI corrects these concerns by smoothing the movement and by creating a constant range from 0 to 100.

The formula for calculating RSI is as follows: RSI= 100-[100/(1+RS)] where RS= average of the days closing higher during the interval divided by the average of the days closing lower during the interval.

The RSI indicator is plotted on a vertical scale of 0 to 100. The general rule of thumb is overbought levels are at 70% and oversold levels are at 30%. When the reading of the indicator surpasses 70, an overbought conditions exists. An oversold condition exists with readings below 30.

Similar to momentum, a trader should look for bullish and bearish divergences to occur when trading with RSI. A 14-day interval is commonly used, but personal fine-tuning and experimentation always is needed.

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You can learn more about the Relative Strength Index by visiting INO TV.

7 thoughts on “Traders Toolbox: Relative Strength Index (RSI)

  1. Rainer,

    I am not too familiar with the OBV as I trade a lot of forex and there is no volume published in the cash markets. The RSI indicator has been around for quite awhile and has proven to be pretty good for spotting divergences.

    Adam

  2. Adam, I have been using OBV (on balance Volume) what are the pros and cons of using RSI vs obv?
    PS: like your videos esp market analysis and using tech indicators!
    Yours,
    Rainer

  3. Sorry for the late comment Weingartner, since I just started following INO, but according to the formula and the data you provided, RSI=100-[100/1+RS] and RS in your example = 12/2, then, RSI=100-[100/1+6], RSI=100-[100/7], RSI=100-[14.29], RSI=85.71. Showing all steps for anyone to follow.

  4. RS= average of the days closing higher during the interval divided by the average of the days closing lower during the interval. Does this mean that in a 14 day interval if a stock went up 12 times and down 2 times the RS would be 6? Thanks, c

    1. C,

      Thank you for your feedback. I have to say I'm a trader and not a mathematician. I would not be the expert in this field.

      Sorry but that's the truth.

      Adam

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