RSI explained, and how to write it as a condition

What it measures

RSI compares the size of recent gains against the size of recent losses over the last N bars — fourteen by default — and puts the answer on a 0 to 100 scale. If the bars that closed up gained more in total than the bars that closed down lost, the reading is above 50; the more lopsided, the further from 50. A reading of 80 means gains have dominated the lookback; 20 means losses have.

That is all it is: a ratio of recent up-moves to recent down-moves. Readings above 70 are conventionally labelled "overbought" and below 30 "oversold". Those are names for regions of the scale, not statements about what happens next — an instrument in a strong trend can sit above 70 for weeks. In SixOne8 the reading is simply a number your condition compares against.

The one setting

The period is how many bars the gains and losses are averaged over. Fourteen is the default and the figure most charts use. A shorter period reacts faster and reaches the extremes far more often; a longer one is smoother and rarely leaves the middle of the scale. Whatever you choose, it is fourteen bars of the timeframe the condition reads: RSI(14) on the 1-hour chart covers fourteen hours, on the daily chart fourteen days.

Writing it as a condition

These are the comparisons SixOne8 offers for RSI, in the builder's own words.

1. Greater than / less than a level. True for every bar the reading is on that side of the level. A state, so an alert fires when the strategy first becomes satisfied and not again while it stays there.
2. Crosses above / crosses below a level. True only on the bar where the reading moves through the level. A moment rather than a state — the usual choice for the condition that should trigger the strategy.
3. Rising / falling. The reading is higher, or lower, than it was the bar before.
4. Crosses above / below its signal line. The signal line is a moving average of RSI itself, drawn beside it; this fires when the two cross.

RSI(14) on 4h  ·  crosses above  ·  30

Read it as a sentence: on the 4-hour chart, the fourteen-period RSI has just moved up through 30. That is what the scanner evaluates at each 4-hour close, and what the alert will say if it is the condition that completed the strategy.

On its own, it fires often

An RSI condition by itself matches whenever the reading reaches the level, which on a fast timeframe is constantly. Most strategies that people keep pair it with a slower condition that describes the context — price above a long moving average on a higher timeframe, for instance — so the RSI condition decides the moment and the other condition decides whether that moment counts. The moving averages guide covers the usual partner.

Divergence — price making a new low while RSI does not — is a separate indicator in SixOne8, with its own comparisons, because it is a different measurement that happens to be built on the same line.