The Relative Strength Indicator (RSI) measures the stock or market that you are analyzing against itself. Do not confuse it with a comparative relative strength which compares the stock against the market or another stock.
The RSI was first introduced by Welles Wilder and he recommended using 14 days as the time period in the calculation. Other time periods have been recommended by other analyst since its inception; primarily the 9 day and the 22 day being the most popular.
This is another indicator you might want to use and combine with your cycle calculations. If you can find a relatively short cycle period that is predominant in the security you are analyzing, use that number for the time period and you potentially have a much more accurate indicator for your use.
For instance with the DJIA one of the predominate cycle periods is 89 days. I use this indicator set for 89 days in looking at my analysis of the DJIA.
Also remember that the predominate cycle time periods fluctuate so don't get locked into one specific time period and expect it to perform for a very long period of time. You will need to go back at regular intervals and check the cycle periods and adjust your other indicators accordingly.
The RSI is displayed on a chart fluctuating between 0 and 100. Traditionally the over bought line is considered to be 70 with the over sold line at 30. These lines too have come under scrutiny by other investors and have caused some debate about what they should be. Some research suggests the
over bought and over sold numbers should be spaced further apart to more accurately reflect the conditions. It has been suggested to use the 75 and 25 lines respectively instead of the traditional values.
Although at extreme readings, over bought and over sold areas or lines give indications of a possible reversal in trend, it should be noted these are only indications and not hard and fast rules. The significance of the RSI signal depends on the length of the time period used for its calculation. The longer the time period used, the more weight should be assigned to the reading of the indicator.
When using the RSI signal with very short time periods you need to be suspicious of the signals. For this reason, you may want to display multiple signals with multiple time periods on your charts. Use a shorter period for short term indications but also keep track of a long term by using a longer signal. The combination of the two will likely give you a clearer picture of what is happening and what the probable outcome may be.
The RSI will provide clues confirming trends or warning of possible reversals. When the analyzed stock or market is making new lows and the RSI is making higher lows is it a good indication of a trend reversal in the making.
Also when the analyzed stock or market is making new highs and the RSI is making lower highs you very well may be looking at a top with a new trend to the downside of indeterminate length. These divergence type of signals are fairly common across all momentum type oscillators.
Another way to use the RSI is to watch the RSI tops and bottoms as they form. The RSI has a tendency to sometimes top or bottom before the price of the security being analyzed. In very short term trading this can be extremely helpful in entering and exiting the markets.
The RSI also forms the same type of patterns that are visible with stocks. The RSI will display head and shoulder formations and well as triangles. Just as with stocks or markets, you can use the RSI indicator to construct trend lines. You would use the same rules as with stocks for trend line violations or areas of support and resistance.
By understanding and accurately using the Relative Strength Indicator you have another lead or hint at what may be coming just around the corner. Combining the indicator with others as well as with multiple time periods may make the difference in your analysis.