How to Calculate RSI

Relative Strength Index (RSI), despite its development in the 19th century it is still the popular momentum indicator followed by a large range of traders and investors over the years.?This was introduced by J. Welles Wilder in his 1978 book “New Concepts in Technical Trading Systems”. It is a momentum oscillator which oscillates between 0 and 100, representing >70 as overbought or overvalued and <30 as oversold or undervalued. The popularity of this indicator is also because of its powerful formulae and the possibility of using RSI Divergence, failure swings and centerline crossovers along with general identification of general trends.?

How to calculate the RSI indicator:

This might be unnecessary as you can find this indicator in any chart of your trading system under indicators/oscillators, but I cannot resist my urge to write its calculation?for anyone who might find other insights from this. The calculation of the RSI indicator is?as follows:

RSI = 100–100/ (1+RS)

Where,

RS = Average Gain / Average Loss

As suggested by Wilder in his book the default RSI calculation takes into account?14 periods which means if you are trying to calculate the RSI of daily you take 14 past days' gains and losses and RSI for weeks you take 14 past week gains and losses.

Average Gain (g) = Sum of all the gains over 14 past periods / 14

Average Loss (l) = Sum of all the losses over 14 past periods / 14

You can smooth the result by

Average Gain = {(g * 13) + current gain} / 14

Average Loss = { (g * l) + current loss} / 14

Sorry that’s it for the calculation I don’t want you to yawn and stop reading by going into detail about this, but if you are curious, you can find this in the original book or google.

You might run into?various investment and day trading strategies while following RSI, like RSI 2, RSI 10, RSI 14, and RSI 20 which might be misleading. Don’t get tangled, these are strategies that individual stock or forex traders follow depending on their trading habits.?You should not try to follow all without knowing one.

An example of a strategy using RSI can be found here.