RSI Indicator

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The Relative Strength Indicator is probably one of the most commonly used indicators. It is probably one of three (Stochastic, MACD, RSI) that the independent trader comes across first when learning to trade.

RSI is an indicator invented by J. Welles Wilder and used to ascertain overbought and oversold and divergent situations. It is calculated by:-


RSI=100-(100/(1+RS))

RS = Average Gain / Average Loss

Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
First Average Gain = Total of Gains during past 14 periods / 14

Average Loss = [(previous Average Loss) x 13 + current Loss] / 14
First Average Loss = Total of Losses during past 14 periods / 14

As it is an oscillator when the RSI is near to zero it suggests that the chart is showing oversold conditions and when it is closer to a reading of 100 it is considered to be overbought.

As with all oscialltors it tends to show tops and bottoms perfectly in hidsight but in real time the price can often continue way beyond the point at which it was first considered to be overbought or oversold. This is one of the reason that the traders look for divergences on the RSI indicator. Thus after the RSI has moved into an oversold position, for example, you would look for a higher low on the RSI whilst the trading instruments price chart makes a new low. This is called positive divergence.

This is the example I have shown in the chart below. Obviously, you would be looking for the opposite to happen if the chart was showing an overbought level on the Relative Strength Indicator. You would be looking for negative divergence in that case.

Click To Enlarge
RSI Indicator

You can download various RSI inidcators from our free download sections.

RSI Indicator For MT4

RSI Indicator For NinjaTrader

And for those who trade using Metatrader 4 you can use this RSI Indicator which allows you to apply smooth the RSI line which is great for intraday trading on the 1 or 5 min charts in my opinion.

One Response

  1. (paul(Learn Relative Strength Index Forex trading system) says:

    The RSI is great for trading momentum as it is a momentum indicator. It is good to tie this together with fundamental reasons the market will be moving to make it more effective rather than just going by what the RSI indicator says “has happened”.
    Thanks,
    Paul

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