Construction

If you are not interested in the calculation of this indicator and would like to get to the interpretations of the Relative Strength Indicator, move on to the next page - Overextended Currencies.

To Calculate RSI:

• The number of days that a currency is up is compared to the number of days that the currency is down in a given time period.
• The numerator in the basic formula is an average of all the sessions that finished with an upward price change.
• The denominator is an average of all the down closes for that period.
• The average for the down days are calculated as absolute numbers.
• The Initial RS is then turned into an oscillator.

Basic Formula:

n = number of RSI periods

a. Initial RS = (Add All Up Closes/n)
(Add All Down Closes/n)

b. RSI = 1 - 100
(1+RS)

The above formula is the basic formula, but in order to account for all past data (to form an exponentially weighted average) one needs to smooth the RS.

Smoothed Formula:

To smooth the RS, once an initial RS is computed, the RS equation above changes to:

(using n = 14, as recommended by Wilder)

[(Initial RS numerator)*13 + Current Gain]/14 (Either current gains or
[(Initial RS denominator)*13 + Current Loss]/14 current losses will be 0.)

Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder's book, “New Concepts in Technical Trading Systems”.

Caution:
One must be forewarned that a very large up or down movement in price in a single day may skew the computation of the average and produce a false signal.

Centerline: The centerline for RSI is 50. A reading above 50 implies the currency is in a bullish phase as average gains are greater than average losses. Readings below 50 indicate a bearish phase.

Overbought and Oversold Levels: Wilder set the levels at which currencies are overextended at 70 and 30. 

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