Relative Strength Index (RSI)

Relative Strength Index is a price momentum indicator. Mathematically, RSI is represented as:

RSI = 100 - [100/(1+RS)]

where,

RS is the ratio of the smoothed moving average of n-period gains divided by the absolute value (that is, ignoring sign) of the smoothed moving average of n-period losses.

RSI quantifies price momentum. It depends solely on the changes in closing prices. Despite its name, it has nothing in common with the traditional relative strength concept, whereby the price of a stock is divided by a broad market index (such as Standard & Poor's 500 Index) to arrive at a ratio that shows the trend of a stock’s performance relative to the general market. Instead, the RSI is actually a front-weighted price velocity ratio for only one item (a stock futures contract, or an index).

RSI is said to indicate an "overbought" condition when it is above 70 (CQG's default set at 75.00) and an "oversold" condition below 30 (default set at 25.00). The center line default is 50.00.

This can be a problem with explosive trends as the RSI above 90 or below 10 shows powerful momentum and an imminent crescendo type top or bottom.

Also, RSI momentum divergences are said to be frequently accurate for indicating that a market turning point is imminent, if quantified correctly. Shaun Downey’s book Trading Time looks at this problem in detail.

Relative Strength Index Parameters

Parameter	Description
Display	Opens sub-window to set parameters • Color = Line color. • Weight = Line thickness. • Display = Line style: line or histogram base 0 or base 50. • ShareScale = Determines whether sharing of the vertical scales between studies is accepted. Auto = System determine whether sharing is feasible. On = Scale is shared regardless of the functions and studies displayed. Off = Scale is not shared. ShareScale must be On if study is overlaid on a study with multiple outputs.
MarkIt	Opens Specify Conditions window.
Period	Number of bars in the lookback range.
Price	Price used to calculate study values.
OB/OS	Opens sub-window with overbought and oversold parameters: • Color = Select a color for the line. • Weight = Choose a thickness for the indicator. • Type = Choose fixed or dynamic. Fixed = uses Level as a fixed OB/OS value. Dynamic = uses Standard Deviation and Lookback for a dynamic OB/OS value:. OB: MA(@,Sim,lookback) + factor * STDDEV(@,lookback) OS: MA(@,Sim,lookback) - factor * STDDEV(@,lookback) where @ is the study • Std Dev = Multiplier used to calculate high and low. • Lookback = Number of bars to compare to the current bar. • Level = Percentage of average OB/OS used to calculate predictor Ob/OS levels. • Display = Click this check box to display the component. • Style = Choose a line style.