# The Relative Strength Index

The RSI or Relative Strength Index is a forex technical analysis oscillator that shows how strong a price is by comparing downward and upward close-to-close movements.

The forex Relative Strength Index is a popular tool because it is rather simple to interpret. The indicator was developed J.W. Wilder and printed in Commodities magazine in 1978.

Keep in mind that the relative strength term can also refer to a security’s strength in relation to its sector or overall market. For example, XYZ might rise 3% when S&P 500 rises 2%. This type is sometimes referred to as CRS or Comparative Relative Strength to help avoid confusion, as the two terms are unrelated.

## FX Relative strength Index Calculation

For each day a downward change (D) or an upward change (U) is calculated. "Up" days are those who closing point was higher than the previous day's daily close. Formula for a RSI up day: U = closetoday − closeyesterday D = 0

On the other hand, down days are those who close lower than yesterday (take note that D is still a positive number.) Formula for a RSI down day: U = 0 D = closeyesterday − closetoday

If today's closing point is the same as the previous day's, both U and D are 0 (zero.) An U average is determined with the help of an exponential moving average, and using a set N-days smoothing factor, as is the case for D.

The ratio of these few averages is the RSI or Relative Strength Index:

This is then converted to a RSI between 0 and 100,

This can also be written as follows to put emphasis on the way RSI shows the up as a part of the total down and up,

In theory, the EMA uses an infinite load of past history data. It's necessary to either go back far enough, or otherwise begin with a relatively simple average of N days,

and then go on from there with the normal EMA formula

### Interpretation of the FX relative strength index

Relative Strength Index 14-period

J. Welles Wilder recommends we use a smoothing period of fourteen, by his calculation of EMA smoothing i.e. α=1/14 or N=27.

He thought a security was overbought when it reached the seventy level, meaning that the trader should think of selling. He thought it was oversold at the thirty level. The idea is that when there's too much daily movement in 1 direction it shows an extreme, and prices will most likely reverse. Levels eighty and twenty are also used, and other variations that depends on market conditions