New Concepts in Technical Trading Systems, originally published in 1978 by J. Welles Wilder, is an excellent book to dig into technical analysis. One of Wilder’s most well known indicators is the Relative Strength Index (RSI).
The RSI is an oscillator that measures the velocity of directional price movement. When it moves up very quickly, eventually it will be considered overbought, the opposite for oversold. In these scenarios, a reversal may be forthcoming. In addition, the RSI is often used to view areas of divergences.
Here’s how Wilder defined the RSI:
RS = Average of 14 day’s closes up / Average of 14 day’s closes down
RSI = 100 – (100 / 1 + RS)
From my research, it seems many RSI indicator’s implement a rolling 14 day RS . However, that is not the approach as defined by Wilder. Wilder defined two distinct calculations:
- Generate the RSI using the first 14 days of the range
At this point you have the RSI of the 14 days average. Going forward you don’t continue to calculate the average over 14 days.
- On day 16 and after, calculate RSI using only the previous days average up close and average down close. The smoothing algorithm follows:
upAverage = ((Previous average up × 13) + current close) / 14
downAverage = ((Previous average down × 13) + current close) / 14
RS = upAverage / downAverage
RSI = 100 – (100 / 1 + RS)
My goal is to create a TradingView indicator that is a direct mirror of what Wilder defined. To that end, my script began with a test case using values from Wilder’s daily worksheet published in his book to verify my calculations. Once I knew I had the correct algorithms, I wrote the indicator.
During my research into the RSI, I bumped into a book by Constance Brown, CMT, Technical Analysis for the Trading Professional. Brown does a number of deep dives into Wilder’s RSI.
One idea proposed by Brown is highlighting areas of support and resistance when in an uptrend. I found this idea intriguing so I added it to my indicator. As I looked back over historical charts, I was impressed with how often the areas highlighted as support/resistance were just that.
Here’s a screenshot showing how the RSI can be used to indicate areas of support and resistance as well as identify divergence between price and the RSI:
Looking for Volunteers to Test the Indicator
The RSI indicator is currently a work-in-process, it is not published on TradingView at this point in time. I am looking for a handful of readers who may have an interest to try the indicator and provide suggestions and feedback.
Update: I am all set on volunteers. 30+ people are running the indicator. Thanks.
Follow the Discussion and Progress on Twitter
For those who expressed interest in what I hope will be a unique spin on the traditional RSI indicator, you should see the script in the Invite-only scripts in the Indicators menu.— John Muchow (@JohnMuchow) February 21, 2021
✅ Traditional oversold/bought
✅ Support/resistance levels
✅ Uptrend/downtrend ranges https://t.co/gUYC47ORLc pic.twitter.com/l3LAslqqFo