Relative Strength Index (RSI)
The relative strength index (RSI) measures a stock’s level of gains against its level of losses over a specified duration of time. The indicator’s calculation is used to help determine overbought or oversold conditions in a given security.
The Relative Strength Index Equation
The equation used to calculate the relative strength index is as follows:
RSI = 100 - 100 / (1 + RS) where RS = (total gains / n) / (total losses / n) and n = number of RSI periods.
Determining the Value of the Relative Strength Index
The value of the relative strength index ranges from zero to 100. In traditional analyzing, a RSI value of 30 or below indicates that the stock was oversold while a value of 70 or above signifies overbought conditions.
While the standard relative strength index calculation uses 14 days as the basis for analyzing, the time period can be adjusted to meet the needs of the individual monitoring the stock’s performance. It is important to note that shorter time periods typically produce more volatile results, so short-term analyzing is best used strictly for short-term trading.
Technical traders will often look to the relative strength index to help determine whether or not a security’s price has been incorrectly increased or decreased to its current level and whether a reversal is imminent as a result of the unreasonable fluctuation.
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