RSI (Indicator)

Developed by J. Welles Wilder, the Relative Strength Index (RSI) is an extremely useful and popular momentum oscillator. The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation. In his book, Wilder recommends using 14 periods.

The RSI (Relative Strength Index) indicator is used in non-trending markets to identify tops and bottoms, buy and sell opportunities, and market extremes (overbought / oversold). The RSI is an oscillator with values ranging from 0 to 100. Many consider 50 to represent the RSI "zero line". This indicator is best used in non-trending markets. Many analysts draw support and resistance lines based on RSI calculations. Divergences between the RSI and price can also indicate certain market conditions.

The RSI indicator calculates a value based on the cumulative strength and weakness of price, specified in the input Price, over the period specified in the input Length. For that number of bars, RSI accumulates the points gained on bars with higher closes and the points lost on bars with lower closes. These two sums are indexed, with the index plotted on the chart. The RSI plots as an oscillator with a value from 0 to 100. The direction of RSI should confirm price movement. For example, a rising RSI confirms rising prices.

RSI can also help identify turning points when there are non-confirmations or divergences. For example, a new high in price without a new high in RSI may indicate a false breakout. RSI is also used to identify overbought and oversold conditions when the RSI value reaches extreme highs or lows. This indicator automatically changes the color of the RSI plot when it exceeds either of the levels specified in the inputs BuyZone and SellZone. Horizontal reference lines are also plotted at these levels as visual aids.

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