Today we take a quick look at a common technical indicator – the Relative Strength Index (RSI). RSI is an indicator that was created by Welles Wilder to compare the magnitude of recent gains and losses over a specified time period in order to measure speed and change of price movements of a security. The correct use of this indicator can indicate ‘overbought’ and ‘oversold’ market conditions for a given asset. It is calculated using the following formula:
RSI = 100 - 100/(1+RS)
Where RS is the average gain of ‘up’ periods during the time frame over the average loss of down periods during the time frame. RSI values range from 0 to 100 and values over 70 are generally considered to indicate ‘overbought’ conditions and values under 30 to indicate ‘oversold’ conditions.
I’ve played with it’s use over the last few days, but it becomes increasingly unstable in the face of large price swings like we see with 3x leveraged ETFs like UGAZ and DGAZ. Most traders use RSI in conjunction with at least one other indicator before accepting its results.
Next we’ll look at an RSI indication conditions called “Failure-Swing Points” that are considered to be more reliable indications of a market reversal.