## A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDER’S RSI, PART 1

J. Welles Wilder, Jr. is one of the most influential figures in modern technical analysis. He developed several popular technical indicators. Among the most popular is his RSI, or Relative Strength Index. Calculation of RSI is simple:

From price series $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ of size $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$, calculate the price change series $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ of size $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ s.t.:

$A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$

From $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$, calculate two series of size , $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ (for gains) and $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ (for losses) s.t.:

$A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$

and

$A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$

For $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ and $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$, we can calculate the Wilder’s Moving Averages$A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ and $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$. From $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ and $A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$ we can calculate Wilder’s Relative Strength Index (RSI):

$A COMPREHENSIVE OVERVIEW OF POPULAR TECHNICAL INDICATORS V. WILDERS RSI, PART 1$

RSI is thought to have many uses as an indicator.  In particular, many investors believe that it can be used to indicate overbought and oversold levels.  Common values of RSI used to indicate overbought and oversold levels are 0.7, for overbought indications–and 0.3, for oversold indications.

In a historical database of stock prices retrieved from Yahoo! Finance, from close to close, from the end of the day when RSI crossed the threshold, from below 0.7 to above 0.7 and above 0.3 to below 0.3, to close five days later, the geometric average returns were (0.135%) for crossing above 0.7 and 0.603% for crossing below 0.3.  Using higher thresholds suggested even greater geometric average five day historical returns, (0.659%) and 1.765% for 0.8 and 0.2, respectively. While not every trade based on RSI makes money, clearly, it has been an incredibly powerful technical indicator.

(Note: When economists refer to Relative Strength, they usually mean the ratio of two price indexes.)