What is RSI: Complete Detail For RSI Calculation

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/ October 21st, 2019
What is RSI?

What is RSI?

The RSI (Relative Strength Index) is a popular indicator used by traders to understand the strength of the price movements on their charts. In this article, we will discuss how to use RSI, formulas, configuration & settings, strengths, and weaknesses.

How to Use it?

RSI is used to determine the overbought and oversold market conditions. It is scaled from 0 to 100 where readings of 30 or lower indicate oversold and 70 or higher indicate overbought conditions.

Oversold increase the possibility of price strengthening and the overbought possibility of price weakening. According to some traders, the overbought currency pair is a clear indication that the rising trend is likely to reverse and they take it as a selling opportunity.

Traders also look for centerline (at the scale point 50) crossovers while they are using the Relative Index Indicator. If the value crosses the centerline (50) and moving towards the 70 line then it will be a rising trend and seen as a bullish signal. A falling centerline crossover occurs when the value crosses the 50 line and moving towards the lower or 30 line and seen as a bearish signal. As you can see in the graph below:

What is RSI?

 

Relative Strength Index (RSI) Calculation Formula

The clear representation of the RSI formula is shown in the picture given below for the understanding of how the calculation formula works.

RSI calculation Formula

 

n is the number of periods that you want to look back on the forex chart to understand and calculate the current RSI value. The by default value of n is 14; you can change the value according to your specific need. There is no right and wrong for the period setting, it depends on your trading strategies and specific goals. RSI look back can be measured in months, weeks, days, hours or minutes. Our advice is to test RSI periods and always chooses a profitable one.

First RSI Graph Point

It can be a difficult approach to understand the numbers, so RS Formula turns the numbers into an index of 0-100.

Sum the up periods and divide the total by the n periods. Apply the same method for downtrends as shown in the formula.

First RSI Graph Point

 

Let’s consider an example of trading with the daily timeframe where n is set to 6. The last four days are as follows:

    1. 42 pips up
    2. 20 pips down
    3. 90 pips up
    4. 40 pips down

Averaging the up days and calculating the numerator:

42 + 90 = 132/4 = 33

Calculate the denominator with down days:

20 + 40 = 60/4 = 15

Now divide the values to get the results:

33/15 = 2.2

RS= 2.2

Conversion of RS Into RSI

Conversion of RSI

Apply the given formula to calculate the RSI value:

100/(1+RS) = 100/ (1+ 2.2)=31.25

RSI = 100-100/(1+RS)=100-31.25=68.75

RSI=68.75

Subsequent RSI Graph Points

After the calculation of the data point, now apply the following formula.

Subsequent RS Calculations

 

Calculate the first n-1 periods for both up and down moves and add the current average to their respective averages and divide each total by n. The complete calculation after adding 5th period in the previous calculation is given below:

  1.       42 pips up
  2.       20 pips down
  3.       90 pips up
  4.       40 pips down
  5.       20 pips down

Calculate the average of first 4(n-1) up periods.

90 / 4 = 22.5

Now multiply the average by 4 or n-1

22.5 * 4 = 90

Repeat the process for the denominator.

20 + 40 = 60 / 4 = 15

15 * 4 = 60

Next, it’s time to calculate the average of the previous 4 periods and the 5th period. The 5th period is a down period; we did not need to add this value in the up period calculation.

90 + 0 = 90/ 5= 18

Add the 5th period down move and average by 5

20 + 40 + 20 = 100 / 5 = 20

Then RS = 18/20 = 0.9

Convert again RS into RSI

Conversion of RSI

 

Again we calculate the conversion of RS into RSI by using this formula.

100 / (1 + 0.9) = 52.63

100 – 52.63 = 47.36

RSI= 47.36

Settings and Configuration

In order to configure the Relative Strength Index, you need to follow these steps:

  • Click on the “Insert” button and navigate to “Indicators”
  • Click on the “Custom” and Select “RSI” from the list of available indicators
  • Press the “Apply” button then the RSI graph will appear at the bottom of your screen with standard settings.
  • You can edit from the “Setup & Apply” tab in order to apply standard (70/30), conservative (80/20), or divergence approach.

RSI Strengths

  • Many markets as forex trade in ranges, so it is a very helpful tool to understand the reversal moves within a range by RSI
  • It is easy to understand the calculation of RSI
  • This technical indicator is widely available

RSI Weaknesses

  • RSI can’t perform its best in trending markets
  • The Oversold or overbought signals are not guaranteed of the market reversal
  • It takes time to master like other trading strategies

Conclusion

You can never ignore the importance of RSI, but keep in mind this indicator is not for all except the people who like the trading reversal moves.

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