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Relative Strength Index - RSI

RSI (Relative Strength Index) is the relative strength index created by Welles Wilder. This index belongs to indicators of technical analysis. RSI follows the price and fluctuates in the range 0 to 100. The creator of the index recommends using 14-period version, but traders also use 9-period and 25-period versions.

Relative Strength Index is used for spotting extreme price behavior. Situation when a price hits a new high while RSI does not reach the previous one shows that the trend is about to reverse. In case when the indicator falls sharply below its gap, it finishes a failure swing, thus predicting the short-term price turning points.

Welles Wilder suggested distinguishing the following RSI signals:

Highs and lows are usually established above the 70 level and then drops below the 30 level leading the price as a rule.

The indicator’s pattern is a triangle or head and shoulders that appears on a price chart.

Failure swing or a break in the level of resistance or the level of support takes place when the indicator hits the high tops or drops below the lows.

When the indicator is out of step with a price chart, more often the price changes its direction in accordance with the RSI.

Calculation

RSI = 100-(100/(1+U/D))

where
U - is the average number of positive price changes;
D - is the average number of negative price changes.

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