Relative Strength Index (RSI)

Celticheart Investor

A beginner's guide to trading and investing

The relative strength index (RSI) is another technical analysis tool created by the renowned J. Welles Wilder who, surprisingly enough started out as a Mechanical Engineer by profession.

He was also a keen investor in real estate and, after just seven years quit working as an engineer to concentrate on real estate full time. It was only after he sold out to his business partner that he started to focus on research and trading, concentrating mainly on silver futures.

He is best known for having developed several technical analysis tools that are now regarded as "core indicators" in trading, such as "Average Gain / Average Loss" and one which we have already covered Parabolic SAR

The RSI is intended to chart the current and historical strength or weakness of a stock or market based on the closing prices of a recent trading period. It's prime function is to compare the amount of recent gains to recent losses to try and identify when the stock has been overbought or oversold and is calculated using the following formula: RSI = 100 - 100/(1 + RS*)

I have extracted a concise description of how RSI works from Wikipedia (with thanks) as it explains it far more succinctly than I could:
How the Relative Strength Index (RSI) works.

http://en.wikipedia.org/wiki/Relative_strength_index

"The RSI is regarded as a momentum oscillator, measuring the velocity and momentum of directional price movements. Momentum is the rate of the rise or fall in price. The RSI computes momentum as the ratio of higher closes to lower closes: stocks which have had more or stronger positive changes have a higher RSI than stocks which have had more or stronger negative changes.
The RSI is most typically used on a 14 day timeframe, measured on a scale from 0 to 100, with high and low levels marked at 70 and 30, respectively. Shorter or longer timeframes are used for alternately shorter or longer outlooks. More extreme high and low levels—80 and 20, or 90 and 10—occur less frequently but indicate stronger momentum."  (Quote courtesy of Wikipedia)





For a more in-depth look at RSI check out the link below:

http://www.investopedia.com/terms/r/rsi.asp#axzz2HC5UYARm

Next time:  An overview of charting

A cautionary note, trading and investing in shares carries a level of risk, these blogs are only meant as a basic guideline to investing and trading, always do your own research and base your decisions on what you can afford to lose. This blog is not intended to provide financial advice as I am not qualified to do so, it is simply designed to provide information about how the markets work that might be of some help to private investors like myself.