Home >Technical analysis >Indicators and oscillators > Wilder's Relative Strength Index (RSI)
RSI (The Wilder's Relative Strength Index) is a rate of change oscillator. It compares the price of a stock to itself and does not compare the relative performance of one stock to another. J. Welles Wilder, Junior created it. This indicator was used to spot negative and positive discrepancies with price. It may also be used to define if a stock or index has reached an oversold or overbought condition.
Values near the 30% oversold. Vice versa, a reading of 70% or higher is usually an overbought position. First, it is important to determine whether a definable trend exists, if used as an oversold/overbought indicator.
V.4:9 (343-346): The Relative Strength Index by J. Welles Wilder, Jr. V.4:9 (343-346): The Relative Strength Index.
After the direction of a primary trend has been successfully identified, use Wilder's RSI to trade precisely according to the trend. The better way to determine it is to use another technical indicator such as price moving averages or trend lines.
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Wilder's RSI: SummaryThe RSI indicator shows that it beats the performance of the S&P 500 index 72% of the time (4,120 winners and 1,574 losing trades) over the same test period.In the test, I included both bull and bear markets, where the bear market ranges from March 24, 2000 to October 10, 2002 and the bull market is everything else. The testincluded data started from January 1990 and ending on May 18, 2008 and used 552 stocks held in a portfolio, but few stocks spanned the entire period.A year by year breakdown of the results show the RSI beats the S&P in 13 out of 19 years. The indicator performed especially well during the bear market but draw downswere severe. Using the RSI to trade is not for traders or investors that cannot stomach massive draw downs as the stock plummets and then rises back to the RSI sell signal.The average hold time is about 5 months, so anything can happen during that time.
To duplicate the results of this test in actual trading, you must be willing to hold ontothe stock, trading only when the RSI signals you to do so, and not because the value has dropped by 98.9% (as was the case in Sonus Networks, resulting in a loss of 94.7%).Using a stop to stem the losses dramatically hurts performance. In other words, if you want to trade using the RSI, you should not use stops if you want the best performance,but you must be willing to buy and hold.Variations to improve performance showed the following. The best performance comes with using buy/sell thresholds of 50/85, with 14/18 day buy/sell look backs, but it requires an average hold time of 4.5 years. Completed trades (wins+losses): 337.
Profit/loss (wins+losses): $593,777.41. Profit/loss (wins+losses) for S&P: $228,038.53. Average completed trade duration (wins+losses): 671 days. Average P/L per completed trade (wins+losses): $1,761.95. Win/loss ratio (wins+losses): 3.7. Change (wins+losses): 29.7%.
Change (wins+losses) for S&P: 11.4%. Change (wins+losses) for S&P (buy and hold: to ): 322.4%.
Maximum loss: -97.3%. Maximum profit: 527.3%Wilder's RSI: Trading ExampleThe figure shows a bar chart of Jo-Ann Stores (JAS) on the daily scale and the RSI indicator beneath that. The red bar is the overbought area at 80 and above.The green bar is the oversold area at 20 and below.
The red RSI line is the sell signal using a 14 day look back and theblue line, which looks black on the chart, is the RSI buy signal line using a 16 day look back.The top chart shows where the RSI moves into the overbought or oversoldareas by using vertical bars of red or green. These are not the buy and sell signals.A buy occurs when the buy RSI line moves below 20 and then above it. The entry happened on January 8 at the opening priceof $10.10, as shown in the chart.The RSI sell line moved to 80 or above then dropped below it. The sale occurred at the opening bell on the next trading day, February 19, at 16.14 for a gain of 59.8% in about 1.5 months.If you look at the complete chart of JAS, you will see that this was a well-timed trade. The entry signal came within a week of the low and the exit occurred just two days afterprice peaked. When the stock finished declining in March, it went on to new highs and peaked at 22.30 in May 2008 (the highest price as I write this), above the sellprice of 16.14.Notice in the chart how the RSI lines begin moving up before price when it leaves congestion.
I show this at A and you can see how far theRSI lines have moved before price actually breaks out of congestion (the day after the left magenta line).A similar prediction occurred at B. The RSI lines were dropping for about two weeks before price followed (at the right magenta line).- Thomas BulkowskiOther RSI Examples.
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March 2023
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