The RSI Indicator (Relative Strength Index)

Measuring the dynamics, or strength, of a market can be an interesting undertaking for investors as this enables the comparison of profits and losses of an asset over a given period. Several technical indicators enable you to obtain such information but this is one that is particularly appreciated by traders. RSI in fact stands for Relative Strength Index.

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The RSI Indicator (Relative Strength Index)
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What is the Relative Strength Index, or RSI?

The RSI is a technical analysis procedure implemented by an analyst, J. Welles Wilder, in 1978 and which was actually the subject of a book named ‘New Concept in Technical Trading System’.

Nowadays the Relative Strength Index is one of the most used indicators throughout the world by technical analysts and investors, both individual and institutional.

The function of this indicator is to take into account the dynamics of a given market, or its strength, by comparing the profits and losses made over a given period.

To achieve this, the RSI only takes into account the closing time rates for the underlying asset. It is therefore a limited indicator of which the value oscillates between 0 and 100.

It is important to note that contrary to other indicators of this type, and despite the name ‘Relative Strength’, the RSI does not compare the asset against an index and therefore a market, it uniquely measures the internal strength of an asset. The losses here are registered as an absolute value and not a relative value.

Although it is possible to use different periods for analysing the RSI, it is recommended to limit analysis to periods 5, 9 and 14. Of course, it is best to test various periods to verify which is the most effective.

 

Calculating the RSI indicator:

As explained above, the RSI uses a comparison of losses and profits registered over a given period. We can therefore say that the calculation formula is as follows:

100- (100/1+(P/L))

We note that P corresponds to the average profit and L the average loss.

 

How to use the RSI indicator when trading?

The interpretation of the RSI aims to provide indications on the speed at which the market is rising or falling. To achieve a good RSI analysis we use the following zones:

  • Between 0 and 30, the RSI indicates an oversell zone. You should therefore avoid selling at this time.  
  • Between 70 and 100, it indicates an overbuy zone. You should therefore avoid buying at this time.
  • Between 30 and 70, it does not give any specific information.

We would like to draw your attention to the fact that the RSI, interesting as it may be, should not be used alone for determining a selling or buying opportunity. It is actually essential to combine the information obtained with other types of indicators such as notably the support and resistance levels. By combining the indications obtained through several different indicators we can obtain more reliable sell or buy signals. 

Another interesting indicator to use with the Relative Strength Index is that relating to divergences, or differences. This is produced when the rate of an asset is moving in the direction contrary to that of the indicator. These differences are extremely reliable when they are used in an overbuy or oversell zone of the RSI index.

Where to find RSI indicators live on graphics?

If the calculation of the RSI index remains complex and reserved for the most experienced traders in terms of technical analysis, you should know that good online brokers offer you to display it automatically on your live graphs, which greatly simplifies your analyzes and allows you to read faster.

Trade with the RSI Index!*
CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 65% of retail investor accounts lose money when trading CFDs with this provider. You should consider whether you understand how CFDs work, and whether you can afford to take the high risk of losing your money.