What is Relative Strength Index or RSI?
Relative Strength Index or RSI is a popular momentum indicator, which can be used for figure oversold and overbrought positions for a give stock. RSI was developed by J. Welles Wilder in 1978. Relative strength index follows a simple mathematical calculation for finding market momentum, of which value ranges from 0 to 100. The formula employed is,
Relative Strength Index = 100 – [100 / (1 + RS)]
RS is the Relative Strength for a specific time period. Its value is determined by the formula
RS = Average gain / Average loss
Both average gain and average loss are calculated for a time period, the standard one is 14 market days. As the value for average gain increases the RS value increases, so does the RSI; and as value of average loss increases RS and RSI value decreases. Relative strength index is a running process and the market understanding improves with time, because of more accurate and detailed data.
As said earlier the most important use of relative strength index is to figure out oversold and overbrought positions. When the RSI is 70 or more the stock is considered as overbrought and when it is below 30, considered as oversold. 50 is the cross-over point which some traders use to confirm bullish or bearish trends. RSI offers better results are obtained when it is combined with other market research tools.
Relative Strength Index = 100 – [100 / (1 + RS)]
RS is the Relative Strength for a specific time period. Its value is determined by the formula
RS = Average gain / Average loss
Both average gain and average loss are calculated for a time period, the standard one is 14 market days. As the value for average gain increases the RS value increases, so does the RSI; and as value of average loss increases RS and RSI value decreases. Relative strength index is a running process and the market understanding improves with time, because of more accurate and detailed data.
As said earlier the most important use of relative strength index is to figure out oversold and overbrought positions. When the RSI is 70 or more the stock is considered as overbrought and when it is below 30, considered as oversold. 50 is the cross-over point which some traders use to confirm bullish or bearish trends. RSI offers better results are obtained when it is combined with other market research tools.
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posted by Daniel Pipitone at
4:14 AM
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