If each session was a loss, the RSI would have a value of 0. Simply said, if over the specified period each session was a gain, then the RSI would have a value of 100. Wilder normalized the RSI with this formula to have a range value from 0 to 100. To create a Smoothed Average Gain, the following calculation is performed: RS = Smoothed Average Gain / Smoothed Average LossĪverage Gain = Sum of gains for the specified periodĪverage Loss = Sum of losses over the specified period The indicator is calculated the following way: The RSI can also be used on timeframes different than the daily, but traders need to pay attention that a shorter setting for the period creates a more volatile RSI, while a longer period creates an RSI less sensitive to price changes. The following chart shows the RSI indicator on the EUR/USD currency pair (blue), notice how the value of the RSI is normalised between 0 and 100.
In the opposite situation, when average losses are larger than average gains during the period, the RSI value moves down. The RSI has a higher value when the average gains for the specified period are larger than the average losses. Wilder recommends using a 14-day period as the standard setting for the RSI. It is therefore primarily used to identify potential overbought and oversold situations for a particular currency pair. The relative strength index (RSI) represents the size of recent gains and losses, during a specified time period, and measures the speed of these price movements. The RSI is, just like the MACD or Stochastics, a momentum oscillator, and requires therefore additional confirmation for opening buy and sell positions. RSI was featured in Wilder’s book „New Concepts in Technical Trading Systems“, and is still widely used today almost 40 years later. In this article, a detailed review of the Relative Strength Index will be presented, along with real-life examples on the currency market.
These include the Average True Range ( ATR), Average Directional Index (ADX), Parabolic SAR, and Relative Strength Index (RSI).
The RSI Indicator Explained The American mechanical engineer and investor, J.Welles Wilder, developed some of the most popular technical indicators used today.
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