Relative Strength Index (RSI)

The relative strength index or RSI for short was developed by J. Welles Wilder. It is classed as a momentum oscillator and measures the speed and magnitude of price movements.

The following calculation is used to generate the RSI.

RSI = 100 - { 100 \over {1 + RS} }

RS refers to the relative strength factor and measures the average number of up days against the average number of down days.

This hourly chart of the EUR/USD (Euro against the US dollar) shows a typical chart with the RSI indicator that has a setting of 14 and an upper line of 70 and lower line of 30. According to Wilder tops are formed when values go above 70 and bottoms when they go under 30. Anything between these two values and it is considered to be neutral.

Wilder also noted that if the RSI was to move in the opposite direction to price (divergence) then this would signal a possible change in the direction of the trend.

The following chart of EUR/USD (Euro against the US dollar) shows both bullish and bearish


A bullish divergence is formed where the price makes a lower low but the RSI makes a higher low thus showing that momentum is possibly on the increase. A bearish divergence is formed where the price makes a higher high and the RSI makes a lower high thus signalling a decrease in momentum. Divergences in themselves do not always signal a trend change and in a strongly trending market these can be misleading as the trend may continue for a considerable period of time in its original direction.