RSI or Relative Strength Index is a commonly used momentum indicator or oscillator, which was developed by J. Welles Wilder in 1978 and detailed in his book ‘New Concepts in Technical Trading Systems’. It is an important tool used in technical analysis. It measures the speed and magnitude of change in price movements. It compares the rate of average gains and losses of a security which ultimately helps in drawing conclusions about its strength or weakness over a specific period of time.
RSI can be calculated by using Relative Strength:
RSI = 100 – (100/1 + RS)
Where, RS or Relative strength = Average gain for specific period/Average loss over the same period.
The Relative Strength Index moves between 0 and 100. RSI is generally considered to be in the over-bought zone, when it is above 70 and in the over-sold zone, when it is below 30. Buying and Selling signals can be generated by looking for divergences and swings. RSI can also be used to identify the overall trend.
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