The Relative Strength Index is a Momentum Oscillator

Cho Sing Kum
5^th Jan 2003

Proof that the Relative Strength Index is a momentum oscillator can be easily found on the very first page of Section VI of Wilder’s book. This is the section that introduces the RSI to the world. In Wilder's own words:

“Before taking up the equation for calculating the Relative Strength Index, let’s examine briefly the momentum concept upon which the RSI is based.”

There you have it in very plain and simple English - the RSI is based on the momentum concept!

I don’t understand how the RSI can subsequently be construed to be an overbought/oversold indicator. The only reason I can think of is that people approach technical analysis with the wrong objective. They carry with them the wrong perception and hence easily misinterpret what they read and hear. Perhaps their minds might have latched on to this paragraph that immediately follows the one above. Still, it does not say that the RSI is an overbought/oversold indicator. Read it very slowly and very carefully.

“The Momentum Oscillator Concept

One of the most useful tools employed by many technicians is the momentum oscillator. The momentum oscillator measures the velocity or directional price movement. When the price moves up rapidly, at some point it is considered to be overbought; when it moves down very rapidly, at some point it is considered to be oversold. In either case, a reaction or reversal is imminent. The slope of the momentum oscillator is directly proportional to the velocity of the move. The distance traveled up or down by the momentum oscillator is proportional to the magnitude of the move.”

In explaining, Wilder uses this method to illustrate:

“The easiest way to illustrate the interaction between price movement and oscillator movement is to take a straight line-price relationship and plot the oscillator points based on this relationship.”

The relationship he refers to is the momentum calculation of today’s price minus the price 10 days ago. I reconstruct the data and chart in the book into the following chart in Fig 1.

Notice at A, as price moves down by the same increment, the momentum oscillator is horizontal. Notice too that at B, the momentum oscillator is horizontal when price continue to move up with the same increment. At C, the price levels out at 51.00, yet the momentum oscillator begins to go down.

“Note the interaction of the oscillator curve and the price curve. The oscillator appears to be one step ahead of the picture; the reason being that the oscillator, in effect, is measuring the rate of change of price movement.”

The words are printed bold in the book. Now, measurement of rate of change of price movement is momentum, my friends. It is not overbought/oversold.

Let me use an analogy I learn in physics. When you throw a ball up into the air, it leaves your hand with increasing velocity. After it has risen some distance in height, the force of gravity will overcome the weakening upward component of the force with which you throw the ball. The ball will then decelerate, stop very momentarily before falling with an ever increasing velocity until it hit the ground.

Now compare the chart in Fig 2 below with the illustration in Fig 1 and read the article The Relative Strength Index is not an Overbought/Oversold Indicator again.

I hope you understand the difference between Momentum and Overbought/Oversold and use the RSI properly.

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