Stocks & Commodities V. 32:5 (28-32): Wilder’s RSI: Extending The Time Horizon by Mike B. Siroky

Stocks & Commodities V. 32:5 (28-32): Wilder’s RSI: Extending The Time Horizon by Mike B. Siroky
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Wilder’s RSI: Extending The Time Horizon by Mike B. Siroky

There’s No Rush

The relative strength index (RSI) is a popular indicator among traders, but how do you figure out how many price bars to include in its calculation, or how high is high, or how low is low? Here’s one way to do it.

In his 1978 book New Concepts in Technical Trading Systems, J. Welles Wilder described several new indicators, including the relative strength index (RSI). Since its introduction, the RSI has achieved widespread use and popularity among stock traders. Wilder himself pointed out some of the advantages offered by the RSI, the most important being a standardized scale of zero to 100.

However, two important questions need to be addressed when using the RSI:

1. How high is high and how low is low on the RSI?

2. How do you select the proper number of bars to use in calculating RSI for the time frame of interest to the trader or investor?

As to the first question, Wilder held the opinion that a value of 70 indicated a turning point to the downside in the near future. This signal would be strengthened if there was also a divergence between RSI and price. Conversely, an RSI value below 30 indicated a turning point to the upside in the near future, also strengthened by a divergence with price. The 70/30 levels are incorporated in most current trading platforms as the default values and often interpreted as overbought or oversold, respectively. However, Wilder himself never used the terms overbought or oversold. In fact, these terms only have meaning in a stock or market that is nontrending or oscillating in a range. Strongly trending stocks or markets, in contrast, can stay overbought or oversold for long periods of time.

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