RSI

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The RSI (Relative Strength Index) is one of the basic and most used indicators in technical analysis. The RSI compares average gain to average loses over specified timeframe (number of price bars) and it is calculated by the following formula:

RSI = 100 - 100 / (1 + RS)

Where RS is:

RS = (Average Gains) / (Average Losses)

One of the negative sides of the RSI is that it is quite choppy and in order to make it more smooth the one have to select higher bar period setting or plot a smoothing moving average on the RSI. The RSI Signal technical indicator is an indicator that performs this task by plotting exponential moving average (red line) on the RSI (black line). In the same way as with MACD Histogram, Stochastics Histogram and SBV Histogram, the difference between actual RSI indicator and its signal line (plotted Exponential MA) forms RSI Histogram.

The RSI Signal line cold be used in the same way as the main indicator is used: generate signal on crossovers with 30 and 70 levels. Another way of using RSI Signal line is to generate signal on crossovers of signal line and indicator line itself. In this case, histogram is usually used, as signal line and indicator crossovers are equivalent to the moments when histogram is equal zero.

Chart 1: Dow Jones Industrials (^DJI) - RSI Signals and Histogram

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