Relative Strength Index (RSI)

Introduction
Vélez Vaylderom Developed and presented in his book "New concepts in technical trading systems" in 1978., Relative Strength Index (RSI) is an extremely useful and popular dynamic oscillators. RSI compares the value of increasing the value of its shares to decline over time and presents this information in the form of value located between 0 and 100. Requires a single parameter - the number of time periods used for computation. Vaylder in his book recommends using 14 periods.

Full name of RSI rather unfortunate, because it can easily be confused with other forms of analysis of the relative strength, such as schedule "relative strength" by John Murphy and the classification of "relative strength" IBD. Most other types of analysis of "relative strength" for the calculation involves the use of more than one share. Like most true indicators, RSI requires only one action for the calculation. To avoid confusion, many avoid using the full name of RSI, and call it only for short - "RSI".

Formula

RSI = 100 - 100 / (1 + RS)

The average increase = total increase / n
The average reduction in the overall decline = / n
The original RS = (average increase / decrease in the average)
Smooth RS = [(previous average increase) * 13 + current increase] / 14
[(the previous average reduction) * 13 + current reduction] / 14
n - the number of RSI periods

To simplify the formula, RSI has been divided into major components, which are the average increase, decrease in average, initial and subsequent smooth RS RS.

For 14 - periodnogo RSI average increase equal to the total amount of all increases divided by 14. Even if there are only 5 increases (decreases), the total amount of 5 increases (decreases) divided by the number of periods of RSI (in this case - 14). The average reduction is calculated in exactly the same.

Calculating the initial values of RS is a direct: The average increase is divided by the average decrease. All subsequent computations use the RS average increase and average decrease in the previous period to smooth (see above formula "smoothed RS"). The table below illustrates the application of the formula:

Then the calculation for lines 14 and 15:

Note: Remember that the average increase and average decrease - not the numbers really mean! Rather than divide by the number of periods in which there is an increasing (decreasing), the total increase (decrease) is always divisible by the specified number of periods - in this case 14.

When the average increase of more than average reduction, RSI is increasing because RS is greater than 1. On the contrary, when the average reduction of more Middle improving, RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100. Please note: If the average decline ever equals zero, RSI is 100, by definition.
Important Note: The more points used to calculate the RSI, the more precise result. Smoothing factor - this is a continuous calculation, which (in theory) takes into account all the values in the closure of the data set. If the RSI calculation starts in the middle of an existing data set, then only some will correspond to the actual RSI. Modern programs use at least 250 points before the start date of any schedule (assuming that such data exist) when calculating the value RSI.

Application
Perekuplennost / Pereprodannost
Vaylder recommended levels of 70 and 30 for perekuplennosti and pereprodannosti respectively. Generally, if the RSI rises above 30, it is considered to be bovine signal for market-based instruments. On the contrary, if the RSI falls below 70, it is - bearish signal. Some traders identify the long-term trend and then use the extreme values for the entry points. If long-term trend is bullish, then the values pereprodannosti could mean the potential entry points.

Divergence
Buy and sell signals can also be made of positive and negative divergence between the RSI and related market instruments. For example, consider a falling tool, RSI which rises from the lowest point (for example) 15 to, say 55. Due to the construction of RSI, market-based instruments will often change its direction soon after such a divergence. As in this case, the divergence that has emerged after the perekuplennosti or pereprodannosti usually provide more reliable signals.

Crossing the center line
Central line is the line for the RSI at 50. Indications above and below it can give the indicator bullish or bearish bias. In general, values above 50 indicate that the average raise is higher than the average decline, as values below 50 indicate that the reduction exceeds the increase. Some traders are looking for movement above 50 to confirm the bull signals or movement below 50 to confirm the bear signal.

Sample

Example DELL shows a lot of extreme values, as well as the negative divergence. In October of 1999., RSI has reached pereprodannosti for a short time, indicating the bottom in the vicinity of 38. The next extreme value (perekuplennost) arose after a large increase, which reached a peak in December 1999. RSI has reached levels perekuplennosti at the end of December 1999. and moved below 50 in the second week of January 2000. The next value pereprodannosti appeared in February in a short period and marked the low point of about 35. By the end of February 2000., RSI is back above 50 and moved into the territory perekuplennosti in March. The negative divergence formed in March and showed up at the top of the fiftieth figures.

RSI and graphics programs
RSI is available in most graphics programs. Typically, there is a window to select the number of periods. In this case, RSI was chosen for 14, 20 and 30 periods. The short-term trader would prefer the 14 periods, while the investor can choose the 30 periods. Users should check the different settings RSI, and choose the ones that work best and suit their individual trading style.

based on www.stockcharts.com