Relative Strength Index

The Relative Strength Index is a technical indicator that can be used to determine when the market is overbought or oversold. First introduced by J. Welles Wilder in 1978, it’s an oscillator that looks at positive and negative closing price changes between intervals. When Wilder first introduced the RSI, he recommended a 14 day average, but 9 and 25 day averages are also used today.

Divergences

An impending reversal is likely if the price hits a new high and the RSI doesn’t. The signal is confirmed if the RSI then falls below its most recent trough; this confirmation is known as a failure swing.

Tops and bottoms

The RSI usually forms tops and bottoms before the price does. Tops are normally formed above 70; bottoms form below 30.

Chart formations

The RSI can show patterns that are not visible in the price chart. These include head and shoulders, and triangles.

Support and resistance levels

The RSI often shows support and resistance levels more clearly than the price chart does.

Relative Strength Index

Calculation

The RSI is calculated using the ratio of positive price changes to negative price changes, normalised to a range of 0 to 100. The calculation is shown below.

RSI = 100 – ( 100 / ( 1 + U /D ) )

U is the average number of positive price changes

D is the average number of negative price changes


You can find more information about technical indicators in the MetaTrader 4 User Guide. Select Help > Help Topics > Analytics > Technical Indicators.