Relative Strength Indicator, Introduction and Application of RSI
introduce
This indicator was introduced by J. Welles Wilder in his 1978 New Concepts in Technical Trading Systems, and RSI became one of the most popular indicators in momentum technology analysis. The index compares the measures of price changes over a period of time (e.g. 7 or 14 days), and then comes up with a figure between 0 and 100, which can predict the future trend of prices. In his book, Wilder recommends 14 as a comparison period.
Calculation
The calculation method of this index is as follows:
100 RSI = 100 - ---------- 1 + RS
RS = Average Growth / Average Decline
Average growth = x 13 + current growth]/14
Initial average growth = growth in the first 14 stages and / 14
Average decline = x 13 + current decline]/14v
Initial average growth = decline in the first 14 stages / 14
Note: The decline here is also calculated in the form of positive numbers.
To explain this formula, RSI is divided into three parts: RS, average growth and average decline. When calculating RSI, we first need to find out the measure of all growth and decline in the 14 stages before the current stage. (Note that the use of 14 here follows the advice of the inventor of the indicator, and you can change the number according to your needs.) When using RSI, it must be understood that the index is dynamic, and its calculation and accuracy are completely affected by the selected time period.
At the beginning of the calculation, the first average growth is calculated by dividing growth by 14 in the previous 14 stages, while the first average decline is calculated by dividing the decline by 14 in the previous 14 stages. Next, multiply the previous average growth or decline just calculated by 13, and divide that sum by 14 to get the average growth or decline.
So it is not difficult to get the RS value, which is the ratio of average growth to average decline. The last step is to change the RS value into a number from 0 to 100, which is relatively strong. So once average growth is greater than average decline, then RS will be greater than 1, so RSI will grow. Conversely, if average growth is less than average decline, then RS will be less than 1, so RSI will fall. (Note: If the average fall is 0, RSI will be 100).
