Technical indicators Relative Strength Index (RSI)

Background

RSI is a momentum indicator that measures the speed and magnitude of a security’s recent price changes to evaluate overvalued or undervalued conditions in the price of that security. It is displayed as an oscillator (a line graph) on a scale of zero to 100.

Besides the indication of overbought and oversold securities, RSI can also point securities that may be primed for a trend reversal or corrective pullback in price. Simply speaking, it can signal when to buy and sell. Traditionally, an RSI reading of 70 or above indicates an overbought situation. A reading of 30 or below indicates an oversold condition.

Python implemenation

import pandas as pd
import sqlite3

# load S&P500 data from stored database
sp500_db = sqlite3.connect(database="sp500_data.sqlite")

df = pd.read_sql_query(sql="SELECT * FROM SP500",
                       con=sp500_db,
                       parse_dates={"Date"})
df.head()

	level_0	index	Date	Ticker	Adj Close	Close	High	Low	Open	Volume	garmin_klass_vol	rsi
0	0	0	2014-04-29	A	35.049534	38.125893	38.304722	37.174534	38.118740	4688612.0	-0.002274	NaN
1	1	1	2014-04-29	AAL	33.476742	35.509998	35.650002	34.970001	35.200001	8994200.0	-0.000788	NaN
2	2	2	2014-04-29	AAPL	18.633333	21.154642	21.285000	21.053928	21.205000	337377600.0	-0.006397	NaN
3	3	3	2014-04-29	ABBV	34.034985	51.369999	51.529999	50.759998	50.939999	5601300.0	-0.062705	NaN
4	4	4	2014-04-29	ABT	31.831518	38.540001	38.720001	38.259998	38.369999	4415600.0	-0.013411	NaN

import pandas_ta

# calculate relative strength index
df['rsi'] = df.groupby(by='Ticker')['Adj Close'].transform(lambda x: pandas_ta.rsi(close=x, length=14))
aapl = df[df['Ticker'] == 'AAPL'].set_index('Date').drop('index',axis=1)
aapl.tail()

	level_0	Ticker	Adj Close	Close	High	Low	Open	Volume	garmin_klass_vol	rsi
Date
2024-04-19	1229877	AAPL	165.000000	165.000000	166.399994	164.080002	166.210007	67772100.0	0.000078	37.902497
2024-04-22	1230380	AAPL	165.839996	165.839996	167.259995	164.770004	165.520004	48116400.0	0.000111	39.784337
2024-04-23	1230883	AAPL	166.899994	166.899994	167.050003	164.919998	165.350006	49537800.0	0.000049	42.166124
2024-04-24	1231386	AAPL	169.020004	169.020004	169.300003	166.210007	166.539993	48251800.0	0.000085	46.706439
2024-04-25	1231889	AAPL	169.889999	169.889999	170.610001	168.149994	169.529999	50558300.0	0.000104	48.493460

# update the database
df.drop('level_0', axis=1).to_sql(name="SP500",
          con=sp500_db,
          if_exists="replace",
          index=True)
sp500_db.close()

import matplotlib.pyplot as plt
from datetime import datetime

# only select the data from 2023-01-01
aapl_new = aapl[aapl.index > datetime(2023,1,1)]

# set the theme of the chart
plt.style.use('fivethirtyeight')
plt.rcParams['figure.figsize'] = (20,16)

# create two charts on the same figure
ax1 = plt.subplot2grid((10,1),(0,0), rowspan=4, colspan=1)
ax2 = plt.subplot2grid((10,1),(5,0), rowspan=4, colspan=1)

# plot the closing price on the first chart
ax1.plot(aapl_new['Adj Close'])
ax1.set_title('AAPL Adjust Close Price')

# plot the RSI on the second chart
ax2.plot(aapl_new['rsi'], color='orange', linewidth=1)
ax2.set_title('Relative Strength Index')

# add two horizontal lines, signaling the buy and sell ranges
# oversold
ax2.axhline(30, linestyle='--', linewidth=1.5, color='green')
# overbought
ax2.axhline(70, linestyle='--', linewidth=1.5, color='red')

<matplotlib.lines.Line2D at 0x183fbdf2a10>

Discussion

Overbought or oversold

Generally, when the RSI indicator crosses 30 on the RSI chart (refer above), it is a bullish sign and when it crosses 70, it is a bearish sign. Therefore when the RSI values are 70 or above, it indicates the security is becoming overbought or overvalued, on the other hand, if an RSI value is 30 or below, it is interpreted that the security is oversold or undervalued.

Uptrend and downtrend

During an uptrend, the RSI tends to stay above 30 and should frequently hit 70. During a downtrend, it is rare to see the RSI exceed 70, and it frequently hits 30 or below.

Limitation

The RSI’s signals are most reliable when they conform to the long-term trend.

True reversal signals are rare and can be difficult to separate from false alarms.

The RSI is most useful in an oscillating market where the asset price is alternating between bullish and bearish movements.

Reference

Relative Strength Index (RSI) Indicator Explained With Formula by JASON FERNANDO