The RSI is among the most popular oscillators and was first introduced by Weilles Wilder in his book, New Concepts in Tehnical Analysis (1978). This version has added graphic plots for when the RSI threshold values are reached.
Indicator Description
The RSI indicator was developed to address two common issues seen with momentum calculations:
- Erratic output caused by values being dropped off in the lookback period
- Lack of a constant benchmark in order to facilitate comparisons
To minimize price distortions, Wilder therefore added smoothing to the momentum calculation. He also set a constant vertical range from 0 to 100. Values above 70 indicate overbought- and below 30 oversold scenarios. However, initial moves into the overbought/oversold areas are often simply early warnings and the price move may still continue.
To avoid premature exits, Wilder therefore combines the oscillator analysis with setting of higher highs or lower lows. You’ll wan to do that in order to identify price failure swings or divergences. You may also use the RSI indicator to identify entries, i.e. when crossing above/below the 30 /70 thresholds.
Other library indicators
The momentum oscillators category features a number of other indicators, including the Awesome Oscillator, Double Smoothed Momentum, Double Smoothed Momentum and a new and improved version of the standard Stochastic. The library also has a category for advanced oscillators, for example the Quantitative Qualitative Estimation (QQE) and the Commodity Channel Index (CCI).
These tools build on the same concept as the standard momentum oscillators, but with a higher degree of sophistication. In general, they allow for added value approaches, utilizing a set of more complex algorithms. Finally, the Ichimoku Kinko Hyo may also be considered as a momentum indicator.
Many standard NinjaTrader indicators cannot be used with an input series other than price. In other words, it is not possible to apply one indicator to another which in some cases may prove very helpful. For example, the RSI indicator may be used with the Library Roofing Filter to correct distortions in the fixed scale threshold readings. You will then see that the threshold levels adjusting automatically according to the current trend scenario. An example on how to apply the Roofing Filter to correct distortions was discussed in our post on Improving Fast Stochastic Setups (with video).
Other than the Stochastic RSI, these indicators include the ADX, ADXR, CCI, Directional Movement, Directional Movement Index, DSS (Blau), DSS (Bressert), Parabolic SAR and the Fast Stochastics / Standard Stochastics. To see how to nest an indicator, you may review our post on Improving Fast Stochastic Setups.
Furthermore, you may use the Relative Strength Index in combination with other tools for technical analysis. For example, you may consider reviewing the Force Index, Regression Channel, Projection Oscillator, Heikin Ashi candles or the Donchian Channel as featured in our Indicator Spotlight. Finally, the Traders Dynamic Index indicator was also discussed in our Spotlight newsletter, suggesting an approach for using the RSI in three timeframes.
The RSI indicator is available for NinjaTrader 8.