The Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a bounded momentum oscillator that compares the magnitude of a currency's recent gains with the magnitude of its recent losses. The RSI ranges between 0 and 100 with 70 and 30 commonly used as overbought/oversold levels. It takes a single parameter, the number of time periods that should be used in the calculation; 14 is commonly used. The RSI was created by J. Welles Wilder.

The RSI's full name is actually rather unfortunate as it is easily confused with other forms of Relative Strength analysis such as John Murphy's "Relative Strength" charts and IBD's "Relative Strength" rankings. Most other kinds of "Relative Strength" stuff involve using more than one stock in the calculation. Like most true indicators, the RSI only needs one stock to be computed. In order to avoid confusion, many people avoid using the RSI's full name and just call it "the RSI."

Formula:

To simplify the formula, the RSI has been broken down into its basic components which are the Average Gain, the Average Loss, the First RS, and the subsequent Smoothed RS's.

For a 14-period RSI, the Average Gain equals the sum total all gains divided by 14. Even if there are only 5 gains (losses), the total of those 5 gains (losses) is divided by the total number of RSI periods in the calculation (14 in this case). The Average Loss is computed in a similar manner.

Note: It is important to remember that the Average Gain and Average Loss are not true averages! Instead of dividing by the number of gaining (losing) periods, total gains (losses) are always divided by the specified number of time periods - 14 in this case.

When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1. Conversely, when the average loss is greater than the average gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100.

Important Note: The more data points that are used to calculate the RSI, the more accurate the results. The smoothing factor is a continuous calculation that - in theory - takes into account all of the closing values in the dataset. If you start an RSI calculation in the middle of an existing dataset, your values will only approximate the true RSI value. SharpCharts uses at least 250 datapoints prior to the starting date of any chart (assuming that much data exists) when calculating its RSI values. To duplicate its RSI number, you'll need to use at least that much data also.