Forex RSI indicator
The RSI (relative strength index) was developed by J. Wallace Wilder. In Russian-speaking environment it is known as relative strength index. The first information about this oscillator was presented in 1978 in the “Commodities” magazine which is known today as “Futures”. However, RSI became popular after the next Wallace Wilder book release called “New Concepts in Technical Trading Systems” and since that time has used actively by traders all around the world for assess the strength movement.
How to use RSI
Relative Strength Index refers, as we already mentioned above, to the oscillators group and indicates the difference in price fluctuations of one asset during the last period of time, presenting this information in number 0 to 100 form. In calculating this index only one parameter is used – time period which is analysis subject.
We would like to draw your attention additionally to the fact that Relative Strength Index can be easily confused with other indexes which are used in technical analysis of foreign exchange market. It should be remembered clearly that the price of only one asset is taken into account when calculating RSI.
To determine the relative strength index, it is necessary for trader only to have the price data and another parameter that determines the amount of price data from the past used in the calculation. The last parameter depends on the reliability of the index – the more data, the more average index. “Parent” RSI Wallace Wilder used in calculation 14 periods and recommended using them. But in principle, it is possible to use any number, depending on the time scale, preferred duration of the prognosis, considered data period, personal priorities, etc.
How Relative Strength Index is calculated
To determine the relative strength index, you need to divide the profit periods (days, weeks, etc.) of the closing from the periods in which the price has fallen in comparison with previous period. That is, starting to technical analysis it is necessary to control closing prices of all periods for which you want to calculate the indicator. Adhering to recommendations of Wallace Wilder we will analyze 14 previous prices for example and divide them into 2 groups properly (growth and falling). Then to calculate 2 average arithmetic (by growth period and falling period). It is important to understand that fallings calculate also in positive numbers.
It is very important to calculate the average growth and fall values for the recent periods that you took into account. It should also be understood that with concrete price data the indicator should be calculated beginning with (n+1)th period, since all previous periods are used for calculating the average growth or falling for the first index’ value.
After the average growth and falling index of the first period is calculated it is possible to calculate the total indicator for each period. It is realized by summing the current growth or decline and the overall average growth or, properly, falling for the previous period and multiplying it on (n-1)/n, where n is the period.
After such calculations, to calculate the relative strength for each period, the total average growth should be divided by the total average fall. You will get RSI for the current period if you add 1 to result, divide number 100 on this value and the result subtract from 100.