RSI is a trading-range momentum indicator developed by Wells Wilder. RSI is also popularly known as Relative Strength Index. FT Cloud and FastTrack does not use that term to avoid confusion with FastTrack’s Relative Strength, R Chart.
When to use RSI?
RSI is a good sensor of tops and bottoms. It can give signals before price direction changes. RSI major weakness is that signals may be too early . . . they are seldom late.
Use RSI with trend lines to time issues that spurt and the stall, for example, technology mutual funds.
- RSI measures the red line’s price momentum. Changing thnndene other lines will not affect the I chart.
- RSI oscillates in a range of 1 to 100. The overbought line is drawn at 70 and the oversold line is drawn at 30.
- Like all trading-range indicators, RSI gives premature signals when the market is trending. RSI signals should be confirmed using trend lines and trend-following indicators.
The RSI chart uses one adjustable parameter, P. P is the number of days averaged and the calculations are based on daily changes in the symbols dividend adjusted price.
Interpreting RSI
The chart of XOM – Exxon Mobil uses a simple interpretation:
Buy when the yellow RSI line moves into oversold territory and the crosses above oversold.
Sell when RSI crosses into overbought territory and them moves crosses the center line moving downward.
This interpretation is appropriate for capturing return during a long-term trendless period. The Buy is quick from oversold levels. The Sell waits for the downtrend to resume.
This chart uses a relatively short RSI value of 14.
Note: There is no “one way” to interpret RSI. The chart above illustrates RSI by itself, but RSI is often used as a confirming indicator in combination with other RSI Indicator trend-following indicators.RSI Indicator RSI Indicator
How to Calculate RSI is Calculated
Step 1
Calculate an initial RSI using a simple average:
- Calculate the Simple Average of the Positive changes in value and another simple Average of Negative changes in value.Both for P number of days.
- AvgDwn = Sum Positive / P
- AvgUp = Sum Negative / P
- Calculate the initial RSI using the Simple Averages of the Positive and Negative changes (This will be the RSI value for day P).
- Initial RSI = 100 – [ 100 / ( 1 + ( AvgUp / AvgDwn ) ) ]
Step 2
Calculate the remaining AvgUp and AvgDwn values using an Exponential Average for Days > P
- AvgUp = [(Previous AvgUp * (P-1)) + Today’s Negative Change] / P
- AvgDwn = [(Previous AvgDwn * (P-1)) + Today’s Positive Change] / P
Step 3
Calculate the RSI for Days < P
- RSI = 100 – [ 100 / ( 1 + (AvgUp / AvgDwn) ) ]
Notes
FastTrack and FT Cloud sets any value of RSI that is less than 1 to 1.
This is unique to FastTrack and FT Cloud and has no impact on the practical interpretation of the chart.