#This is the calculation for the relative strength index (RSI)

Welles Wilder developed this indicator and is commonly used by traders to gauge the: momentum of a stock or instrument, as well as oversold and overbought levels.

This can also be used with price levels to show divergence (price going up and RSI going down or vice versa)

30 and below is considered to be oversold
70 and above is considered to be overbought

As with all indicators, there is a duality. In heavy trends, the RSI usually stays embeded 50 to 90 for a long time. This is where it is more of a momentum indicator. However, this type of power usually happens less of the time, while most of the time when the market hits below 30 it will usually retrace back up, or if it hits 70 or above it will usually retrace back down.

So, this is a pretty decent "exit indicator"

Calculations

RSI = 100 - (100/(1+RS))

RS = Average Gain / Average Loss

difference = previous price - last price if difference >= 0 it is called a "Gain" which goes in the @gain container. elsif difference =< 0 it is called a "Loss" which goes into the @loss container.

Average Gain is calculated from the gain container by:

1.  First value = the sum of last 14 (period = 14) values/14 
2.  Next values = [(previous average gain)*13 + current gain]/14

The previous average gain comes from the @average_gain container and the current gain comes from the @gain container.

The same is calcualted to get the Average Loss and is put into the @average_loss container.

BTW, when I used the word container, I am mean @average_loss = [] which is an array. However, I am using the term in terms of what it is doing which is acting as a container to hold stuff for a while until I don't need it.

After this comes the RS calculation:

RS = Average Gain/Average Loss
so each element from the @average_gain and @average_loss will be
calculated.  What is nice is they are both the same size 
mathematically.

Last, since some stocks are $500 per share and some are $5 per share, the RS value will vary greatly. Therefore we have to apply the formula

RSI = 100 - (100/(1+RS))

This puts all stocks to the scale of 0 to 100 no matter what the stock price.

There is a lot of number crunching when it comes to the RSI, but this indicator is very good as an exit indicator for already being in a trade, as well as a momentum indicator when you have other information that a trend is about to start or has already started. In this case, the RSI is a good confirmation indicator when it is above 50 for long and below 50 for short.