Relative Strength Index (RSI).

Relative Strength Index is one of the most popular indicators that works well in the trading market.

This name was given to the term by its developer Wells Wilder. The formula for determining the indicator consists of two quantities:

• U (n) – the sum of positive price changes at the end of n periods,
• D (n) – the sum of negative price changes in those time periods in which sales ended with a reduced price compared to the previous period.

Thus, the relative strength index (RSI) shows the dynamics of price changes in the direction of their movement, transforms the cost into a percentage, showing the places of purchase (up to 30%) and sales (over 70%).

Just like the stochastic oscillator , which is a well-known technical term, the relative strength index (RSI) determines what the value of the item under study actually is, compared to historical prices. In stochastics, the relative strength index is determined as a percentage, making up the full edges of supply and demand, more or less than which the indicator does not fall.

This indicator is not similar to other available indicators that determine the relative price strength of changes. For the most part, oscillators use more than one price to identify the strength of a certain index relative to another. In this case, the relative strength index works only with data from past periods of the object under study, thereby showing its transformation strength relative to its own indicators.

Method for determining the relative strength index

When calculating the relative strength index (RSI), only price information is used and a single indicator that counts the amount of data about past value. Thus, the more information is available, the more reliable the indicator is. Welles Wilder preferred the use of 14 periods when calculating the relative strength index. But here any other figure of the relative scale of periodicity, the expected duration of predictions, the period of the information studied, one’s own advantages, etc. can also be used.

To calculate the relative strength index, you need to determine the closing periods that gave income from previous periods, the value of which decreased relative to the previous period. In other words, before starting the analysis, it is necessary to study the completion costs of all indicators of previous periods. If you follow the suggestions, you need to familiarize yourself with 14 previous prices and distribute them into groups that include growth and decline.

Next, you should calculate the total amount of increase and decrease, and begin calculating RSI.

The average value of price increases and decreases during previous periods is very important for calculating the relative strength index. In addition, if certain value data is available, the indicator can only be calculated from the first period, since the remaining time periods will be used to calculate the average increase or decrease for the 1st determination of RSI.

To determine the magnitude of the average growth and decline of the initial period, you need to start with a general calculation of the average increase and decline. The value for the average increase in each period is the sum of the present profit (loss) and the total average increase (decrease) for the previous period, multiplied by the indicator of the first period and divided by the general indicator.

Then, for each interval, you need to divide the average increase by the average decrease. The result is relative strength. By adding 1 to a certain number, putting the resulting amount in the denominator, and 100 in the numerator. Then you need to subtract the resulting fraction from one hundred, resulting in an index of the relative strength of the present period.

Using the RSI indicator is similar to working with Stochastic, selling is carried out in the overbought zone above 70, selling in the oversold zone below 30. In this case, the price must make a reversal and tend to leave one of the zones. Also, a guideline when opening transactions is how close the price is to these zones and in which direction it is moving at that time. You will find other useful technical analysis tools in the Forex indicators .