Formula & Calculation of RSI
1. Determine the Time Period: RSI is calculated for a specific time periods, generally 14 days, but can be adjusted according to preferences.
2. Calculate Average Gain and Average Loss: For each day within the chosen time period,
- Calculate the price change (difference between today’s closing price and yesterday’s closing price).
- If the price change is positive (a gain), add it to the total gains for the period.
- If the price change is negative (a loss), add the absolute value of it to the total losses for the period.
- After calculating gains and losses for each day in the period, divide the total gains by the number of days to get the average gain, and divide the total losses by the number of days to get the average loss.
3. Calculate Relative Strength (RS): Divide the average gain by the average loss to get the Relative Strength (RS).
[Tex]RS=\frac{Average~Gain}{Average~Loss}[/Tex]
4. Calculate RSI: Calculate the Relative Strength Index (RSI) using the following formula,
[Tex]RSI=100-(\frac{100}{(1+RS)})[/Tex]
5. Interpret RSI: The RSI value ranges between 0 and 100.
- A reading above 70 typically indicates that the asset is overbought.
- A reading below 30 typically indicates that the asset is oversold.