How to Determine Look-Back Periods for Relative Strength Index (RSI) Based on Trading Objective

Relative Strength Index (RSI) was introduced by J. Welles Wilder in 1978.  It is categorized as a momentum oscillator, one of the most popular and practical technical indicators.  It is intended to gauge the velocity (speed with positive or negative direction) and movement magnitude for the entire stock market, or individual stocks.

By default, the RSI is calculated based on 14 day worth of data. This index ranges from 0 to 100.  The relative strength index 50 is the trend line.  When the relative strength index slips below 50, it technically means that the stock's losses are greater than the gains. However, when the relative strength index goes beyond 50, it basically means that the gains are greater than the losses.

Technically speaking, when the RSI reaches 70, this indicates that the market or an asset enters overbought territory.  The market or stock may be getting overvalued and might be due for a pullback. On the other hand, when the RSI goes below 30, this signals that the market or an asset enters oversold condition.  The market or individual stock might consolidate and bottom out in the near term. 

The RSI with the lower look-back period is more suitable for momentum traders who focus on shorter term profit and quick turn-around.  If traders choose RSI (14), most of time, the RSI reading stays in neutral status (between 30 and 70).  The contrast is not that sharp.  In our daily log, we opt 5-day as RSI look-back period. You can adjust it based on your trading habits and objectives, and track it consistently. You will discover its trend, and hopefully it will benefit your trading.

Comparing RSI with 5 as the look-back period with that keeps the default look-back period 14. It is obvious that the RSI (5) has larger scales of up and down movement, and is easier to swing between overbought and oversold conditions. Thus, RSI (5) shows more sensitivity, since the look-back period has been shortened.  The lower the look-back days, the higher sensitivity the RSI tends to have and the easier the RSI is able to reach the extremes (either overbought or oversold). On the other hand, the cycles and extremes are more insightful for RSI with shorter look-back days.

Investors and traders can define the parameters for the RSI by choosing different look-back periods according to their trading purpose. The most common setting for the look-back period is 14. Other popular settings are 9, 7, and 5, which work to increase the volatility and sensitivity of the RSI.

Swing traders often customize the RSI by assigning 5 as the look-back period, while day traders more favor 2 as the option. Some technical analysts use longer periods like 40 and 50, in order to smooth the RSI curve in anticipation of obtaining more reliable signals.

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