Relative Strength Index (RSI) Technical Indicator

The Relative Strength Index (RSI) is a technical momentum indicator used to gauge the relative changes between the lowest and the highest close prices of a currency.

The RSI was developed by J. Welles Wilder Jr. and is currently one of the most widely used tools in the forex market.

Relative Strength Index Calculation

In order to calculate the RSI forex traders should apply the following formula:

RSI = 100 - [100 / (1+RS)]

To obtain the value of RS:

RS = Average of x number of trade periods' up closes (those that were higher than all preceded closes) / Average of the same x number of trade periods' down closes (those that were lower than all preceded closes)

14-day time period is generally used for the calculation of the RSI. Additionally, a 0 to 100% scale is used for the plotting of the RSI charts.

Relative Strength Index Indications

The 70% and 30% levels of the RSI chart are considered warning signals of overbought and oversold conditions. If the value of the RSI is above 85%, then forex traders should interpret it as a signal to sell, since overbought conditions are already at place. On the other hand, if the value of the RSI is below 15%, then traders should interpret it as a signal to buy, because oversold conditions are being experienced.

When technical analysis is applied, it is recommended that the RSI is combined with the Ballinger Bands. Thus, when the upper Bollinger Band touches with the price chart by a high RSI value, a sell position should be opened. On the other hand, a buy position should be opened when the bottom Bollinger band touches with the price chart by a low value of the RSI.