Why We Choose 5 as Look-Back Period for Relative Strength Index (RSI)

Relative Strength Index was designed to gauge the market sentiment (bullishness, bearishness, and neutral), and identify overbought and oversold condition. Traders often use it to detect the potential market reversals.

The default Look-Back Period for Relative Strength Index (RSI) is 14 days. However, the market swings between overbought and oversold, the contrast is not that sharp. If we shorten the look-back period, the movement of RSI becomes more sensitive. The RSI is easier to reach extremes as well. Thus it can facilitate traders to detect the market pattern and trend in near term.

Here are comparison between RSI (5) and RSI (14).

                            chart 1: RSI (5)
                                source: stockcharts.com

                            chart 2: RSI (14)
                                source: stockcharts.com

Of course, you can customize the look-back period at your will as long as you consistently track RSI readings. You are going to corporate them into your trading model and make successful investment and trading.

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