RSI (Relative Strength Index)
The RSI is an oscillator from 0 to 100 that compares recent gains and losses to tell whether a stock has risen or fallen too fast.
It was devised by J. Welles Wilder in 1978 and is usually calculated over 14 periods. Above 70 the stock is considered "overbought" (it may pause), below 30 "oversold" (it may rebound).
How it's calculated
You calculate the average gain and the average loss over the last 14 periods (counting zero in periods without that move), then RS = average gain / average loss and RSI = 100 − 100 / (1 + RS). After the first value the averages are updated with Wilder's smoothing: new average = (previous average × 13 + today's value) / 14.
Worked example
Over the last 14 days the stock rose on 8 days for a total of €4.20 and fell on 6 days for a total of €2.10. Average gain = 4.20 / 14 = €0.30; average loss = 2.10 / 14 = €0.15; RS = 0.30 / 0.15 = 2; RSI = 100 − 100 / 3 = 66.7.
How to read it
An RSI of 66.7 indicates a strong but not yet excessive upward push. In a very strong trend the RSI can stay above 70 or below 30 for a long time: it's a signal to be confirmed, not a rule.
Related entries
Put it into practice, risk-free.
Try it with €100,000.00 in virtual money and real prices: free and no credit card needed.