7-12 Relative Strength Index (RSI)
RSI is the acronym for “Relative Strength Index.” The RSI was created in 1978 by J. Welles Wilder to compare the strength and magnitude of a stock’s gains and losses in recent time periods. The simple formula converts this winning and losing data into a number ranging from 0 to 100.
To keep the analysis simple, you should examine the RSI’s three factors: RS (relative strength), Average Gains, and Average Losses. The formula: 100 – (100/RS + 1), where RS is the Average Gain divided by the Average Loss over the period being studied.
Most analysts use the acronym “RSI” instead of its full name as there are other “relative strength” formula developed by analysts. These “competitors” tend to be more complex and use data from multiple stocks instead of just one as used by the RSI. As a newer investor, the RSI should be more relevant as you try to determine the relative strength or weakness of a security you’re considering putting into or removing from your portfolio.
On most virtual accounts, you can draw RSI lines by using the “Lower Indicators” drop-down menu on the chart page.
The RSI is a momentum oscillator that indicates the direction and strength of a price movement. As mentioned above, RSI range or oscillate between 0 to 100. The most popular setting to use is the 14-period RSI. Wilder recommended using 70 and 30 overbought and oversold levels respectively.
If the RSI rises above 30, it’s considered bullish for the underlying stock. Conversely, if the RSI falls below 70, it’s a bearish signal. If the long-term trend is bullish, then oversold readings could mean a potential long entry point. Readings above and below the 50 line can give the indication of a bullish or bearish bias. On the whole, a reading above 50 indicates that average gains are higher than average losses and the buyers are winning. A reading below 50 indicates that bears are winning the battle.
