Don’t confuse RSI with other “relative strength” indices, which you’ll find in discussions of stocks etc. – these refer to relative strength as a comparison between 2 or more different stocks – and so not what we’re doing here in forex…

The RSI plots the magnitude of recent gains versus the magnitude of recent losses – so again, it’s an oscillator, ranging from 0 to 100. It takes a single parameter, the number of time periods used – 14 periods is common, (and was the recommendation of J. Welles Wilder, the popularizer of this indicator – like so many others).

Again, I won’t go through the full math here to produce the Relative Strength (it involves iteration and other slightly fancy work) because your software will do all this for you.
RSI is simply RS converted to an oscillator using: 100 – (100 / RS + 1).

So the average centerline value for RSI is 50. Over 50 suggests a bullish trend (average gains greater than average losses), while under 50 suggests bearish. But the main value of RSI is when it starts heading for the extremes, ie over 70, or less than 30.

Overbought/Oversold

What goes up must come down – and vice-versa.
An RSI of 70 suggests that the market may have peaked (i.e. the bulls have run out of steam), the market is overbought – and so RSI dropping back below 70 may indicate a reversal and can be taken as a signal to sell.
Similar, RSI under 30, then rising back above suggests that market may have bottomed out, and a bullish trend may be arriving shortly.

Centerline Crossover – some traders straightforwardly use a move above 50 for RSI as a bullish signal, and a move below 50 as bearish.

Here’s a real-life example:

As it turned out, a good signal as the market became oversold towards the end of the period and RSI dropped below 30 and then cut back up, heralding a good solid bull market. As always, life isn’t utterly simple with forex indicators – perhaps a less clear result from RSI on the previous trip above 70 and then below again – the trend was rather sluggish here…

One Response to “The Relative Strength Index, or RSI”

1. ForexPerform » Forex Divergences says:

   November 4, 2008 at 3:29 pm

   [...] and its associated indicator(s) start going in opposite directions. Commonly, indicators such as RSI or MACD are the likely candidates. There is a classification of divergence into positive or [...]

   Reply