Overview

The Relative Strength Index ("RSI") is 
a popular oscillator. 
It was first introduced by 
Welles Wilder in an article 
in Commodities (now known as Futures) 
Magazine in June, 1978. 
Step-by-step instructions on calculating 
and interpreting 
the RSI are also provided in 
Mr. Wilder's book, 
New Concepts in Technical 
Trading Systems.

The name "Relative Strength Index" 
is slightly misleading 
as the RSI does not compare 
the relative strength of two securities, 
but rather the internal strength of 
a single security. 
A more appropriate name might 
be "Internal Strength Index." 
Relative strength charts that compare 
two market indices, 
which are often referred to as 
Comparative Relative Strength. 
Wilder, J. Welles. New Concepts 
in Technical Trading Systems. Greensboro, NC: Trend Research, 1978.

     Interpretation

When Wilder introduced the RSI, 
he recommended using a 14-day RSI. 
Since then, the 9-day and 25-day 
RSIs have also gained popularity. 
Because you can vary the number 
of time periods 
in the RSI calculation, I suggest 
that you experiment 
to find the period that works best for you. 
(The fewer days used to calculate the RSI, 
the more volatile the indicator.)

The RSI is a price-following oscillator 
that ranges between 0 and 100. 
A popular method of analyzing the RSI 
is to look for a divergence 
in which the security is making a new high, 
but the RSI is failing to surpass its previous high. 
This divergence is an indication of an impending reversal. 
When the RSI then turns down and 
falls below its most recent trough, it is said 
to have completed a "failure swing." 
The failure swing is considered a confirmation 
of the impending reversal.

In Mr. Wilder's book, he discusses five uses 
of the RSI in analyzing commodity charts. 
These methods can be applied to other security 
types as well.

Tops and Bottoms.

The RSI usually tops above 70 and bottoms below 30. 
It usually forms these tops and bottoms before 
the underlying price chart. 
     
     Chart Formations.

The RSI often forms chart patterns such 
as head and shoulders (page 215) or triangles (page 216) 
that may or may not be visible on the price chart. 
   
     Failure Swings.

also known as support or resistance penetrations or breakouts). 
This is where the RSI surpasses a previous high (peak) or 
falls below a recent low (trough). 
  
     Support and Resistance.

The RSI shows, sometimes more clearly than price themselves, 
levels of support and resistance. 
    
     Divergences.

As discussed above, divergences occur when the price makes 
a new high (or low) that is not confirmed by a new high (or low) i
n the RSI. Prices usually correct and move in the direction 
of the RSI. 
For additional information on the RSI, refer 
to Mr. Wilder's book: 
on amazon com 
for example.


     Calculation

The RSI is a fairly simple formula, but is difficult 
to explain without pages of examples. Refer to Wilder's book 
for additional calculation information.