The Relative Strength Index (RSI) is an indicator that provides predictions about the direction of the short and medium-term trend calculated by comparing the closing values of the relevant period with the previous closing values of the period. The RSI is displayed as an oscillator (a line graph) on a scale with a range of 0 and 100. The indicator was first developed by J. Welles Wilder Jr. and introduced in the 1978 book, “New Concepts in Technical Trading Systems”.
How the RSI Works?
As a momentum indicator, the relative strength index compares a security's strength on days when prices go up to its strength on days when prices go down. Relating the result of this comparison to price action can give traders an idea of how a security may perform. The RSI, used in conjunction with other technical indicators, can help traders make better-informed trading decisions.
Why is the RSI Important?
Traders can use the RSI to predict the price behavior of a financial asset. It can help traders validate trends and trend reversals.
The RSI can point to overbought and oversold financial assets.
The RSI can provide short-term traders with buy and sell signals.
The RSI is a technical indicator that can be used with others to support trading strategies.
How is the RSI Calculated?
The formula used to calculate the RSI is as follows:
RSI = 100 - 100 / ( 1 + RS )
RS = Relative Strength = AvgU / AvgD
AvgU = average of all up moves in the last N price bars
AvgD = average of all down moves in the last N price bars
N = the period of RSI
