John Hayden - RSI: The Complete Guide

Creating this manuscript was made possible with the help of three individuals. I would like to take this opportunity to thank my wife, Valeriya Hayden, who has supported me in countless ways. I would also like to thank Joe Schedlbauer, who was invaluable in critiquing the ideas that this manuscript encompasses. And finally, I would like to thank Edward Dobson. His unfailing encouragement helped me complete the writing of this comprehensive book about the RSI. Without this encouragement, this manuscript would never have been born. Thank you.

A book only comes alive when the reader becomes involved with the subject matter. I would like to take this opportunity to say Thank you to the readers of this book for taking their valuable time to learn more about truly understanding price behavior.

In trading, as in life, what often appears obvious is not important and what is not obvious is important

- John Hayden

I n the old pre-personal computer days, bar charts and indicator values had to be calculated and plotted by hand on honest-to-goodness paper charts. It was during this early time that the Relative Strength Index or RSI first made its appearance.

In June 1978, Welles Wilder introduced the Relative Strength Index to the trading community in an article for Commodities Magazine . In his classic book, New Concepts in Technical Trading Systems, Mr. Wilder provided step-by-step instructions on calculating and interpreting the Relative Strength Index. As time has passed, other indicators with similar sounding names have been developed. The majority of traders refer to this index as the RSI instead of the Relative Strength Index. This helps to avoid confusion with other indicators with similar names. For example, Investors Business Daily publishes its Relative Strength Rankings and John Murphy promotes his Relative Strength Charts. Neither of these relative strength tools is related to Welles Wilders Relative Strength Index or RSI, as we shall call it.

The Relative Strength Index (RSI) is one of the most popular momentum oscillators used by traders. It is so popular that every charting software package and professional trading system anywhere in the world has it as one of its primary indicators. Not only is this indicator included in every charting package, but it is not out of the realm of possibility that every system has identical original default settings.

There are many reasons that the Relative Strength Index quickly became so popular with traders. When hand plotted in conjunction with a daily bar chart, it provided interpretative information on market tops and bottoms, chart formations, market reversals, areas of support/resistance, and price/indicator divergence. All of this information was rolled into one easy to calculate formula, so what was not to like? At this time, enter the personal computer bringing with it the ability to manipulate numbers in the blink of an eye. The personal computer has made the process of decision-making so easy with instant real-time charts and indicator overlays that most traders simply do not know where to begin.

It is so simple to jump into trading using the preset system default values that novice traders often begin trading without testing different parameters or educating themselves on the proper interpretation of an indicator because of the desire to make money quickly! As a result, the RSI is also one of the most widely misused technical indicators!