Relative strength index - Wikipedia

Calculation Relativestrengthindex FromWikipedia,thefreeencyclopedia Jumptonavigation Jumptosearch Indicatorintechnicalanalysis Therelativestrengthindex(RSI)isatechnicalindicatorusedintheanalysisoffinancialmarkets.Itisintendedtochartthecurrentandhistoricalstrengthorweaknessofastockormarketbasedontheclosingpricesofarecenttradingperiod.Theindicatorshouldnotbeconfusedwithrelativestrength. TheRSIisclassifiedasamomentumoscillator,measuringthevelocityandmagnitudeofpricemovements.Momentumistherateoftheriseorfallinprice.TheRSIcomputesmomentumastheratioofhigherclosestolowercloses:stockswhichhavehadmoreorstrongerpositivechangeshaveahigherRSIthanstockswhichhavehadmoreorstrongernegativechanges. TheRSIismosttypicallyusedona14-daytimeframe,measuredonascalefrom0to100,withhighandlowlevelsmarkedat70and30,respectively.Shortorlongertimeframesareusedforalternatelyshorterorlongeroutlooks.Highandlowlevels—80and20,or90and10—occurlessfrequentlybutindicatestrongermomentum. TherelativestrengthindexwasdevelopedbyJ.WellesWilderandpublishedina1978book,NewConceptsinTechnicalTradingSystems,andinCommoditiesmagazine(nowFuturesmagazine)intheJune1978issue.[1]Ithasbecomeoneofthemostpopularoscillatorindices.[2] TheRSIprovidessignalsthattellinvestorstobuywhenthesecurityorcurrencyisoversoldandtosellwhenitisoverbought.[3] RSIwithrecommendedparametersanditsday-to-dayoptimizationwastestedandcomparedwithotherstrategiesinMarekandŠedivá(2017).Thetestingwasrandomisedintimeandcompanies(e.g.,Apple,ExxonMobil,IBM,Microsoft)andshowedthatRSIcanstillproducegoodresults;however,inlongertimeitisusuallyovercomebythesimplebuy-and-holdstrategy.[4] Contents 1Calculation 2Interpretation 2.1Basicconfiguration 2.2Principles 2.3Divergence 2.4Overboughtandoversoldconditions 2.5Uptrendsanddowntrends 2.6Reversals 3Cutler'sRSI 4Seealso 5References 6Externallinks Calculation[edit] ForeachtradingperiodanupwardchangeUordownwardchangeDiscalculated.Upperiodsarecharacterizedbytheclosebeinghigherthanthepreviousclose: U = close now − close previous {\displaystyleU={\text{close}}_{\text{now}}-{\text{close}}_{\text{previous}}} D = 0 {\displaystyleD=0} Conversely,adownperiodischaracterizedbytheclosebeinglowerthanthepreviousperiod'sclose(notethatDisnonethelessapositivenumber), U = 0 {\displaystyleU=0} D = close previous − close now {\displaystyleD={\text{close}}_{\text{previous}}-{\text{close}}_{\text{now}}} Ifthelastcloseisthesameastheprevious,bothUandDarezero.TheaverageUandDarecalculatedusingann-periodsmoothedormodifiedmovingaverage(SMMAorMMA)whichisanexponentiallysmoothedMovingAveragewithα = 1/period.Somecommercialpackages,likeAIQ,useastandardexponentialmovingaverage(EMA)astheaverageinsteadofWilder'sSMMA. Wilderoriginallyformulatedthecalculationofthemovingaverageas:newval=(prevval*(period-1)+newdata)/period.Thisisfullyequivalenttotheaforementionedexponentialsmoothing.Newdataissimplydividedbyperiodwhichisequaltothealphacalculatedvalueof1/period.Previousaveragevaluesaremodifiedby(period-1)/periodwhichineffectisperiod/period-1/periodandfinally1-1/periodwhichis1-alpha. Theratiooftheseaveragesistherelativestrengthorrelativestrengthfactor: R S = SMMA ( U , n ) SMMA ( D , n ) {\displaystyleRS={\frac{{\text{SMMA}}(U,n)}{{\text{SMMA}}(D,n)}}} IftheaverageofDvaluesiszero,thenaccordingtotheequation,theRSvaluewillapproachinfinity,sothattheresultingRSI,ascomputedbelow,willapproach100. Therelativestrengthfactoristhenconvertedtoarelativestrengthindexbetween0and100:[1] R S I = 100 − 100 1 + R S {\displaystyleRSI=100-{100\over{1+RS}}} Thesmoothedmovingaveragesshouldbeappropriatelyinitializedwithasimplemovingaverageusingthefirstnvaluesinthepriceseries. Interpretation[edit] Basicconfiguration[edit] Relativestrengthindex7-period Bitcoin,RSI-14,bearishdivergenceoccurs TheRSIispresentedonagraphaboveorbelowthepricechart.Theindicatorhasanupperline,typicallyat70,alowerlineat30,andadashedmid-lineat50.Wilderrecommendedasmoothingperiodof14(seeexponentialsmoothing,i.e.α = 1/14orN = 14). Principles[edit] Wilderposited[1]thatwhenpricemovesupveryrapidly,atsomepointitisconsideredoverbought.Likewise,whenpricefallsveryrapidly,atsomepointitisconsideredoversold.Ineithercase,Wilderdeemedareactionorreversalimminent. TheleveloftheRSIisameasureofthestock'srecenttradingstrength.TheslopeoftheRSIisdirectlyproportionaltothevelocityofachangeinthetrend.ThedistancetraveledbytheRSIisproportionaltothemagnitudeofthemove. WilderbelievedthattopsandbottomsareindicatedwhenRSIgoesabove70ordropsbelow30.Traditionally,RSIreadingsgreaterthanthe70levelareconsideredtobeinoverboughtterritory,andRSIreadingslowerthanthe30levelareconsideredtobeinoversoldterritory.Inbetweenthe30and70levelisconsideredneutral,withthe50levelasignofnotrend. [5] Divergence[edit] WilderfurtherbelievedthatdivergencebetweenRSIandpriceactionisaverystrongindicationthatamarketturningpointisimminent.BearishdivergenceoccurswhenpricemakesanewhighbuttheRSImakesalowerhigh,thusfailingtoconfirm.BullishdivergenceoccurswhenpricemakesanewlowbutRSImakesahigherlow.[1]: 68  Overboughtandoversoldconditions[edit] Thissectiondoesnotciteanysources.Pleasehelpimprovethissectionbyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.(June2014)(Learnhowandwhentoremovethistemplatemessage) Wilderthoughtthat"failureswings"above50andbelow50ontheRSIarestrongindicationsofmarketreversals.[6]Forexample,assumetheRSIhits76,pullsbackto72,thenrisesto77.Ifitfallsbelow72,Wilderwouldconsiderthisa"failureswing"above70. Finally,WilderwrotethatchartformationsandareasofsupportandresistancecouldsometimesbemoreeasilyseenontheRSIchartasopposedtothepricechart.Thecenterlinefortherelativestrengthindexis50,whichisoftenseenasboththesupportandresistancelinefortheindicator. Iftherelativestrengthindexisbelow50,itgenerallymeansthatthestock'slossesaregreaterthanthegains.Whentherelativestrengthindexisabove50,itgenerallymeansthatthegainsaregreaterthanthelosses. Uptrendsanddowntrends[edit] Thissectiondoesnotciteanysources.Pleasehelpimprovethissectionbyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.(June2014)(Learnhowandwhentoremovethistemplatemessage) InadditiontoWilder'soriginaltheoriesofRSIinterpretation,AndrewCardwellhasdevelopedseveralnewinterpretationsofRSItohelpdetermineandconfirmtrend.First,CardwellnoticedthatuptrendsgenerallytradedbetweenRSI40and80,whiledowntrendsusuallytradedbetweenRSI60and20.Cardwellobservedwhensecuritieschangefromuptrendtodowntrendandviceversa,theRSIwillundergoa"rangeshift." ExampleofRSIIndicatorDivergence Next,Cardwellnotedthatbearishdivergence:1)onlyoccursinuptrends,and2)mostlyonlyleadstoabriefcorrectioninsteadofareversalintrend.Therefore,bearishdivergenceisasignconfirminganuptrend.Similarly,bullishdivergenceisasignconfirmingadowntrend. Reversals[edit] Thissectiondoesnotciteanysources.Pleasehelpimprovethissectionbyaddingcitationstoreliablesources.Unsourcedmaterialmaybechallengedandremoved.(June2014)(Learnhowandwhentoremovethistemplatemessage) Finally,CardwelldiscoveredtheexistenceofpositiveandnegativereversalsintheRSI.Reversalsaretheoppositeofdivergence.Forexample,apositivereversaloccurswhenanuptrendpricecorrectionresultsinahigherlowcomparedtothelastpricecorrection,whileRSIresultsinalowerlowcomparedtothepriorcorrection.Anegativereversalhappenswhenadowntrendrallyresultsinalowerhighcomparedtothelastdowntrendrally,butRSImakesahigherhighcomparedtothepriorrally. Inotherwords,despitestrongermomentumasseenbythehigherhighorlowerlowintheRSI,pricecouldnotmakeahigherhighorlowerlow.Thisisevidencethemaintrendisabouttoresume.Cardwellnotedthatpositivereversalsonlyhappeninuptrendswhilenegativereversalsonlyoccurindowntrends,andthereforetheirexistenceconfirmsthetrend. Cutler'sRSI[edit] AvariationcalledCutler'sRSIisbasedonasimplemovingaverageofUandD,[7]insteadoftheexponentialaverageabove.CutlerhadfoundthatsinceWilderusedasmoothedmovingaveragetocalculateRSI,thevalueofWilder'sRSIdependeduponwhereinthedatafilehiscalculationsstarted.CutlertermedthisDataLengthDependency.Cutler'sRSIisnotdatalengthdependent,andreturnsconsistentresultsregardlessofthelengthof,orthestartingpointwithinadatafile. R S = SMA ( U , n ) SMA ( D , n ) {\displaystyleRS={\frac{{\text{SMA}}(U,n)}{{\text{SMA}}(D,n)}}} Cutler'sRSIgenerallycomesoutslightlydifferentfromthenormalWilderRSI,butthetwoaresimilar,sinceSMAandSMMAarealsosimilar. Seealso[edit] StochasticOscillator MACD,movingaverageconvergence/divergence Truestrengthindex,asimilarmomentum-basedindicator References[edit] ^abcdJ.WellesWilder,NewConceptsinTechnicalTradingSystems,ISBN 0-89459-027-8 ^ JohnJ.Murphy(2009).TheVisualInvestor:HowtoSpotMarketTrends(2nd ed.).JohnWileyandSons.p. 100.ISBN 9780470382059. ^Deng,S.;Sakurai,A.(2013-03-01)."ForeignExchangeTradingRulesUsingaSingleTechnicalIndicatorfromMultipleTimeframes".201327thInternationalConferenceonAdvancedInformationNetworkingandApplicationsWorkshops:207–212.doi:10.1109/WAINA.2013.7.ISBN 978-1-4673-6239-9.S2CID 14825935. ^Marek,Patrice;Šedivá,Blanka(2017)."OptimizationandTestingofRSI".11thInternationalScientificConferenceonFinancialManagementofFirmsandFinancialInstitutions. ^"RelativeStrengthIndex".InvestorsUnderground.DayTradingEncyclopedia.Retrieved29June2016. ^"RSI".StockCharts.StockCharts.com.Retrieved29June2016. ^Cutler'sRSIpageatAspenGraphicsTechnicalAnalysisSoftware Externallinks[edit] vteTechnicalanalysisConcepts Breakout Deadcatbounce Dowtheory Elliottwaveprinciple Markettrend Charts Candlestick Renko Kagi Line Open-high-low-close Pointandfigure PatternsChart Broadeningtop Cupandhandle Doubletopanddoublebottom Flagandpennant Gap Headandshoulders Islandreversal Pricechannels Triangle Tripletopandtriplebottom Wedgepattern CandlestickSimple Doji Hammer Hangingman Invertedhammer Marubozu Shootingstar Spinningtop Complex Hikkakepattern Morningstar Threeblackcrows Threewhitesoldiers IndicatorsSupport&resistance Bottom Fibonacciretracement Pivotpoint(PP) Top Trend Averagedirectionalindex(A.D.X.) 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