RSI - Relative Strength Index

The Relative Strength Index (RSI) is a study introduced by technical analyst Welles Wilder in his book New Concepts in Technical Trading Systems published in 1978.

Wilder cites three reasons for using RSI:

1. to avoid the erratically High values returned by other oscillator-type indicators such as Momentum or Rate of Change. Wilder sought some way to dampen or smooth out the extreme points used to calculate the oscillator.
2. it always returns a value between zero and one hundred, regardless of the asset it is applied to. This allows one to identify the most active commodities by identifying those in which the RSI is showing the greatest vertical movement - either up or down.
3. it is easy to calculate and keep track of. After calculating the initial RSI, only the previous day's data is required for the next calculation.

Wilder then goes on to point out five possible uses for the RSI:

The first usage is with tops and bottoms. The Index will usually top out or bottom out before the actual market top or bottom, giving an indication that a reversal or at least a significant reaction is imminent.

The second usage is with chart formations. The RSI line will sometimes form patterns such as head and shoulders tops or bottoms, pennants or triangles which indicate breakouts and buy and sell points.

The third usage is called Failure Swings. These swings occur when the RSI tops out or bottoms out, retraces slightly to what is known as the fail point, shows some indecision (sideways movement) and then retraces pass the fail point.

The fourth usage is Support and Resistance. Areas of support and resistance often show up clearly on the index before becoming apparent on the bar chart.

The fifth and final usage Wilder points out is Divergence. Divergence is a phenomenon where the RSI is moving in the opposite direction of price.

Wilder uses fourteen for the period and Close for the price in his work.


Wilder, Welles, Jr. New Concepts in Technical Trading Systems. Trend Research. McLeansville, NC