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The Relative Strength Index (RSI) is one of the most popular
overbought/oversold (OB/OS) indicators. The RSI is basically an
internal strength index which is adjusted on a daily basis by the
amount by which the market rose or fell. It is most commonly used to show
when a market has topped or bottomed. A high RSI occurs when
the market has been rallying sharply and a low RSI occurs when
the market has been selling off sharply. The RSI is expressed as
a percentage, and ranges from zero to 100%.
One characteristic of the RSI is that it moves slower when it
reaches increased overbought or oversold conditions, and then
snaps back very quickly when the market enters even a mild
correction. This brings the RSI back to more neutral levels and
indicates that the price trend may be able to resume.
When Wilder introduced the RSI, he recommended using a 14-day RSI. Since then, the 9-day and
25-day RSIs have also gained popularity. The fewer days used to calculate the RSI, the more
volatile the indicator.
The RSI is a price-following oscillator that ranges between 0 and 100. A popular method of
analyzing the RSI is to look for a divergence in which the security is making a new high, but
the RSI is failing to surpass its previous high. This divergence is an indication of an impending
reversal. When the RSI then turns down and falls below its most recent trough, it is said to have
completed a "failure swing." The failure swing is considered a confirmation of the impending reversal.
The formula for the RSI:
N.B.Because of the use of exponential moving averages it is extremely difficult to
calculate the relative strength by hand, because it requires consideration of all the data
back to the beginning of the contract.