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RELATIVE STRENGTH INDEX SIGNAL (RSI SIGNAL)
Doug Schaff
FX-Strategy
| Characteristic: | Momentum Indicator | ||
| Parameter Defaults: | RSI Period | 14 | controls the measurement period for the RSI |
| RSI Signal | 9 | controls the measurement period for the average of RSI | |
| Plots: | RSI | ||
| Signal | |||
RSI is a popular indicator commonly used to confirm price movement and help identify turning points in the market. It was created by Welles Wilder Jr.
The RSI calculates a value based on the cumulative strength and weakness of price over a specified period. For that period, RSI accumulates the points gained on periods with higher closes and the points lost on periods with lower closes. The sum of number of the points gained is divided by the sum of the points lost and this is normalized between 0 to 100. The direction of RSI is considered to confirm price movement, i.e. a rising RSI confirms rising prices.
In general RSI is used either as an indicator of overbought or oversold market conditions in consolidating markets or to identify divergences at trend exhaustion. The basic direction of RSI is said to dictate the underlying direction of price. However, there are many occasions when the RSI fails to reach the opposite extreme and reversal occurs earlier. In addition, RSI does not produce a straight line and the many small turns can cause confusion as to price direction. Some traders will therefore calculate a simple moving average of the RSI as an indicator of price direction and may also use the crossing of the RSI across its average as buy or sell signals.
