5.10 Relative Strength Index (RSI)

The calculation of RSI requires several steps:

1. Whether price has gone up or down each day
2. Relative strength (RS): the ratio of the (simple or exponential) average numbers of up day to the average of down day
3. Relative strength index (RSI): normalize RS to the scale from 0 to 100.

Step 1. Upward and downward indicators, $U_t$ and $D_t$, are

$$U_{t}=\left\{ \begin{array}{cl} 1, & P_t>P_{t-1} \\ 0, & P_t \leq P_{t-1} \end{array} \right.$$ and $$D_{t}=\left\{ \begin{array}{cl} 0, & P_t\geq P_{t-1} \\ 1, & P_t < P_{t-1} \end{array} \right.$$

Step 2. Then $up_{t}(N)$ and $down_{t}(N)$ are average numbers of upward moves and downward moves of closing price of past $n$ days:

If we use simple average, then we have $$up_{t}(n)=\frac{U_t+U_{t-1}+...+U_{t-n+1}}{n}$$ and $$down_{t}(n)=\frac{D_t+D_{t-1}+...+D_{t-n+1}}{n}$$ . Instead, We may use exponential moving average.

Relative strength (RS) is relative ratio of days with upward moves and downward moves during last n days. Formally, it si $$RS=\frac{up_{t}(n)}{down_{t}(n)}$$

Step 3. Finally, an n-day RSI is given by

$$RSI_t(n) = 100\frac{RS_{t}(n)}{1+RS_{t}(n)}$$ where RSI is normalized relative strength.

In calculation, we usually consider directly:

$$RSI_t(n) = 100\frac{up_{t}(n)}{up_{t}(n)+down_{t}(n)}$$

Below is our RSI function:

myRSI <- function (price,n){
  N <- length(price)
  U <- rep(0,N)
  D <- rep(0,N)
  rsi <- rep(NA,N)
  Lprice <- Lag(price,1)
  for (i in 2:N){
    if (price[i]>=Lprice[i]){
      U[i] <- 1
    } else {
      D[i] <- 1
    }
    if (i>n){
      AvgUp <- mean(U[(i-n+1):i])
      AvgDn <- mean(D[(i-n+1):i])
      rsi[i] <- AvgUp/(AvgUp+AvgDn)*100 
      }
    }
  rsi <- reclass(rsi, price)
  return(rsi)
}

rsi <- myRSI(Cl(AAPL), n=14)
tail(rsi,n=3)

##                [,1]
## 2012-12-26 35.71429
## 2012-12-27 35.71429
## 2012-12-28 35.71429