RSI Indicator Formula, Meaning, Trading Strategy

RSI calculation

The RSI indicator is a momentum indicator. This indicator measures the magnitude of recent price changes to analyze overbought or oversold conditions. This RSI is also a momentum oscillator. It also measures the speed and change of price movements and this oscillator oscillates between zero and 100. RSI (Relative Strength Index) indicator developed by J. Welles Wilder, the author of New Concepts in Technical Trading Systems. This RSI can also be used to identify the general trend.

Usage of the RSI Indicator :

The traders can find the RSI In the Zerodha Kite platform, under the STUDIES section. It is also available in the Kite mobile App. The Period is 14 and you can set the value of it high and low. The OverBought is 80 and the OverSold is 20 you can change it also. You can check how we attached the indicator in Reliance Industries share price chart. You can attach the RSI indicator on to any charts likes daily, weekly, monthly or intraday.

RSI Indicator

Formula and Calculation of RSI indicator :

The basic formula is RSI indicator :

RSI = 100 – [100 / ( 1 + (Average of Upward Price Change / Average of Downward Price Change ) ) ]

RSI calculation

How this indicator works :

  • This indicator is considered when above 80 then overbought conditions and when below 20 then oversold condition. The traditional levels can also be adjusted if necessary. An example, if a security is repeatedly reaching the overbought level of 80 then people want to adjust this level to 90.
  • The chart patterns of this indicator should not show on the underlying price chart, likes double tops and bottoms and trend lines.
  • The RSI indicator in an uptrend or bull market tends to remain in the 40 to 90 range with the 40-50 zone acting as support and a downtrend or bear market tends to stay between the 10 to 60 range with the 50-60 zone acting as resistance. In RSI settings depending on these ranges and the strength of the security’s or market’s underlying trend.
  • In the indicator, if underlying prices make a new high or low then divergence can signal a price reversal. This indicator also makes a lower high and then it downside move below a previous low, and it has occurred a Top Swing Failure. If the indicator makes a higher low and then it upside move above a previous high, and it has occurred a Bottom Swing Failure.

Conclusions :

RSI indicator is a versatile momentum oscillator that has stood the test of time. In the developer of RSI, Wilder considers overbought conditions ripe for a reversal, but overbought can also of strength. In this, the bearish divergences still produce some good sell signals. In this indicator, positive and negative reversals put price action of the underlying security first and the indicator second, which is the way it should be. The bearish and bullish divergences of the indicator is a place for price action. On price action of RSI, the concept of positive and negative reversals challenges people thinking towards momentum oscillators.

RSI Indicator Formula, Meaning, Trading Strategy

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