The Relative Strength Index (RSI) is one of the more popular technical analysis tools; it is an oscillator that measures current price strength in relation to previous prices. The RSI can be a versatile tool, it might be used to:
#Generate potential buy and sell signals
#Show overbought and oversold conditions
#Confirm price movement
#Warn of potential price reversals through divergences
#RSI Potential Buy Signal A trader might buy when the RSI crosses above the oversold line (30).
#RSI Potential Sell Signal A trader might sell when the RSI crosses below the overbought line (70).
the Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. RSI oscillates between zero and 100. According to Wilder, RSI is considered overbought when above 70 and oversold when below 30. Signals can also be generated by looking for divergences, failure swings and centerline crossovers. RSI can also be used to identify the general trend.
100
RSI = 100 - --------
1 + RS
RS = Average Gain / Average Loss
RSI calculation is based on 14 periods, which is the default suggested by Wilder in his book. Losses are expressed as positive values, not negative values.
The very first calculations for average gain and average loss are simple 14-period averages:
First Average Gain = Sum of Gains over the past 14 periods / 14. First Average Loss = Sum of Losses over the past 14 periods / 14 The second, and subsequent, calculations are based on the prior averages and the current gain loss:
Average Gain = [(previous Average Gain) x 13 + current Gain] / 14. Average Loss = [(previous Average Loss) x 13 + current Loss] / 14. Taking the prior value plus the current value is a smoothing technique similar to that used in calculating an exponential moving average. This also means that RSI values become more accurate as the calculation period extends.