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Relative Strength Index (RSI)
Relative Strength Index (RSI) Example
The Relative Strength Index is a technical indicator that measures momentum - both speed and change of price movement for currency pairs. The RSI indicator helps identify overbought or oversold markets by finding the average gains and average losses over a period of time. The default input period is 14.
How to Calculate RSI
Relative strength can be calculated by breaking it up into sections. With an input of 14 Periods, 30 close prices would be needed to have 14 accurate periods. The first period cannot be compared, so it’s considered to be dead. Whilst the next 14, should be considered a warm up time. Here is an optimized version of the RSI calculation.
There are two parts to the RSI calculation. The first one is calculating the first RSI value in the list.
First Average Gain = Sum Gains of past 14 periods / 14
First Average Loss = Sum Losses of past 14 periods / 14
The base average has been established, so now each subsequent value uses the previous averages along with the current value.
Average Gain = ((Previous Average Gain x 13) + current Gain) / 14
Average Loss = ((Previous Average Loss x 13) + current Loss) / 14
Excel Formula Example
The spreadsheet is a working example of the Relative Strength Index with all formula calculations. For this example, AUD/CAD Daily price closes were used, based on the 22:00 GMT close.
NB: It’s important to safeguard against divide by zero errors, therefore conditional statements are added. Study each cell, excluding the gray ones. You can input your own dates and close prices for any periods.
Each value is a relative number between 0-100.Traders generally consider any value over 70 to be overbought and any value below 30 to be oversold. Values over 80 or below 20 are considered hyper extensions and will most likely start to retrace. This happens because the underlying currency price cannot be sustained at such a rate of movement.
Greater than 70 = Sell Less than 30 = Buy
The example above shows 34 days of RSI values. There were areas in which the RSI reached over 70, however there was also a sharp decline down to 31. Each value should be plotted on a graph to help visualize the rapid decline:
X Axis = Periods (Time) Y Axis = Values
The graph below shows the key levels: red lines mark 80 and 20, yellow line mark 70 and 30. The blue line is the RSI values. The large middle area is no man's land.
Relative Strength Indicator
The RSI is a simple but effective indicator. It should be used in conjunction with other indicators to provide an area of confluence to prevent false signals being produced.
Using the RSI indicator is a great way for contrarian traders to look for overextended markets. JKonFX PRO has a dedicated RSI dashboard (below) with 24 currencies dedicated to finding over-extended and hyperextended markets in real time. The interactive dashboard shows the RSI Graph as shown above when the number is hovered over.