✔️ Information reviewed and updated in December 2023 by Eduardo López
There are different groups of traders and analysts who are in charge of implementing different analysis tools, however, there are subgroups of experts who combine fundamental and technical factors to obtain better answers from each indicator when applying them.
In this article you will find the information you need about one of the most important technical indicators the RSI.
What is the RSI?
The Relative Strength Index or the also known Relative Strength Index was created by J. Welles Wilder, who before becoming a technical analyst, worked as a mechanical engineer. This situation allowed him to develop not only the indicator, but he was also able to create other indicators such as the Average Directional Index, the True Average Range and the Parabolic SAR.
The SRI is a price oscillator, and a price oscillator is a technical indicator that varies over time between two major points or key levels., which determine market conditions. The Relative Strength Index is responsible for showing the strength of the price, by counting the speed and magnitude of recent changes in the price, thus representing the overbought and oversold market conditions.
How is the RSI indicator calculated?
The calculation of this indicator can be expressed in the following mathematical formula that is divided into two parts. The first reflects the initial value of the Relative Strength, presents the relationship between the average UP closing and the average Down closing within a certain period, which we will name as period N.
RSI = 100 - (100/1 + RS)
To understand it better let's take as an example a setting of the standard period at 14. Then:
- RS or Relative Strength is the average profit divided by the average loss.
- Average profit = To the sum of the profits in the last 14 periods between the same fourteen.
- Average loss = The sum of losses in the last 14 periods out of 14.
Losses are usually counted as positive values. And in the second step we can obtain the results:
RSI = 100 - (100 / (1 + [Previous Average Profit x 13 + Current Profit] / [Previous Average Loss x 13 + Current Loss])
How does the RSI work?
One of the main functions of the RSI is to determine the condition of the market, for which you need to deeply analyze this indicator. Level 30 represents an edge of the oversold area, so a break below this level indicates that sellers will be able to prevail in the bag. This situation indicates that the asset is oversold and that traders can expect a market reversal.
You should not forget that a fundamental element in trading is that of the rise or fall of the asset, so the indicator will give you a signal if it crosses the ascendant of 30 levels.
Reasons why you should implement it
- It is one of the easiest to apply.
- It is part of the most accurate indicators.
- Its signs are easy to read.