RSI - definition
RSI definition. Explained for Australia forex traders. Plain-English, no jargon. Calculation example included.
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions. It compares the average gains to average losses over a specified period, typically 14, generating a value between 0 and 100. RSI works best in ranging markets and may produce false signals during strong trends or low-volatility environments.
Formula
RSI = 100 - [100 / (1 + average gain / average loss)]
Where average gain = sum of gains over the last 14 periods / 14, and average loss = sum of losses over the last 14 periods / 14.
Example
Consider AUD/USD over 14 days: total gains = 3.2%, total losses = 1.8%. Average gain = 3.2/14 = 0.2286; average loss = 1.8/14 = 0.1286. RS = 0.2286/0.1286 = 1.777. RSI = 100 - (100/(1+1.777)) = 64.0. This indicates moderate bullish momentum, not yet overbought.
Edge cases
- In strongly trending markets (e.g., AUD/JPY during a sustained rally), RSI can remain above 70 or below 30 for extended periods, producing false reversal signals.
- ASIC-regulated brokers in Australia may require RSI to be calculated on daily closes, not intraday ticks, for compliance reporting.
- Non-standard periods (e.g., 9 or 21) shift sensitivity—shorter periods generate more signals but increase false positives.
See also
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