Relative Strength Index (RSI) was developed by J. Welles Wilder in 1978. Nowadays, it is considered to be the most popular oscillator.
Relative Strength Index (RSI) formula:
RSI = 100 - (100 / (1 + U / D))
Where:
· U - average value of the positive price changes over a period;
· D - average value of the negative price changes over a period.
The most frequently used time periods are 8 and 14.
RSI indicator is considered overbought if it is above the 70 level, and oversold if it is below the 30 level.
Relative Strength Index (RSI) signals:
· If the indicator is below the 50 line, then the market is considered to be bearish;
· If above the 50 level - bullish;
· If the indicator is around the 50 line it signals that the market is flat;
· Bullish divergence / bearish convergence – the main signal of the trend weakness;
· Under flat conditions exit from the overbought (oversold) territory is a signal to sell (buy);
· Different types of the trend analysis can be used to analyze Relative Strength Index (RSI): trend lines,support / resistance levels, chart reversal and continuation patterns.
The figure below, for example, shows that the trend line on RSI being broken several bars before the analogical line on the price chart:
