The RSI (Relative Strength Index) indicator is used by many charting technicians to measure the strength and momentum of a security's price action. Traders calculate RSI by averaging the price movement of a security over a specified period of time, typically 14 periods, with the RSI values ranging from 0 to 100. If the RSI crosses above 30 it may signal the start of an uptrend, while a cross below 70 may signal the start of a downtrend. The RSI formula uses the following steps:
- Calculate the average increase and decrease in security’s price over the specified time period.
- Calculate the Relative Strength (RS) by dividing the average gain by the average loss.
- Calculate the RSI by using the following formula: RSI = 100 - (100 / (1 + RS))
If the RSI crosses above 30 from oversold territory, it may signal the start of an uptrend, while a cross below 70 may signal the start of a downtrend. The RSI indicator is just one tool among many that traders use to analyze price action, and it should always be used in conjunction with other indicators and analysis techniques.
The following parameters can be adjusted based on the individual trader's preferences and risk tolerance:
Length: The number of periods used to calculate the RSI. The default setting is 14 periods, but traders may adjust this parameter to suit their preferences. Shorter time periods may be more responsive to short-term price movements, while longer time periods may provide a smoother trend line.
Overbought: Upper bound threshold level, defaulted to 70
Oversold: Lower bound threshold level, defaulted to 30
Price: Type of price used for RSI calculation: HIGH, LOW, OPEN, CLOSE, VOLUME, VWAP
Average Type: Exponential, Hull, Simple, Smoothed, Weighted, Wilder’s
RSI Indicator on chart
*For illustrative purposes only. Not a recommendation of a specific security or investment strategy.