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What Is The Relative Strength Indicator?
The RSI is a multi-purpose indicator – you can use it to avoid costly trading errors, spot hidden opportunities and find markets just before they skyrocket.
The RSI is widely used to:
The most popular way to use the RSI is to identify temporarily overbought and oversold levels.
Confirm The Current Trend
The RSI is also useful to identify powerful trends. It tells us the price has moved to a new trading range and gives us the opportunity to make big profits.
The RSI is also a good way to identify divergences; where price makes a new low and the RSI fails to make a new low.
Why Do You Need to Calculate the RSI Indicator?
If you are making trading decisions based on the RSI Indicator you should understand how it is calculated. Firstly because you are risking your own money based on a line on a chart and you should be professional in all your actions as a trader. Professionals make money, amateurs have fun and take shortcuts.
Secondly, because it will allow you to unlock the market’s secrets by analysis. You will no longer be reliant on gurus and trading tips. You can develop, test and optimize your own strategies.
Steps to Calculate the RSI
You calculate the RSI by taking the average of the most recent gains and dividing it by the average of the most recent losses.
Time needed: 5 minutes.
Create Two Columns To
- Create Two Columns To Show the Gains and Losses
Create a column to record to gains (close price greater than the previous close) and another column to record losses (close price lower than the previous close).
- Create Two Columns To Calculate the Average Gains and Losses
The next two columns calculate the gains and losses. In the top cell use the AVERAGE formula. In the next cell use the formula:
(Current Value + (Previous Average * (Number of Periods – 1)) / Number of Periods
- Calculate the Relative Strength
Divide the average gains by the average losses to get the relative strength.
- Calculate the RSI
Take the Relative Strength and convert it into the RSI by using the following formula:
100 – (100/(1 + Relative Strength))
|Date||Close||Gains||Losses||Gains Ave||Losses Ave||Relative Strength||RSI|
YouTube RSI Calculation Video
Upward Movement O5 =IF(F5>F4,F5-F4,)
Downward Movement P5 =IF(F5<F4,F4-F5,)
Average Upward Movement Q18 =AVERAGE(O5:O18)
Average Downward Movement R18 =AVERAGE(P5:P18)
Relative Strength S18 =Q18/R18
RSI T18 =100-(100/(S18+1))
Next Step – Boost Your Winning Trades
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