RSI Technical Indicator

Unfortunately there are two different types (and meanings) of Relative Strength when it comes to stock market trading, and this fact can lead to possible confusion. One of the types of Relative Stength is the type used to compare the performance of a particular stock with another stock or sector of the market, or with the whole market itself, or even to compare whole markets worldwide (for example to compare the relative performance of the UK Stock Market in comparison to the USA stock market). This type is not what will be discussed on this page, but instead the Relative Strength Index developed by J. Welles Wilder Jr is a momentum oscillator which is based purely on the price changes of a single particular stock, share or security, and does not compare that individual stock to others or to a sector or the market as a whole.

Calculation of the RSI Indicator

If we call the period of days prior to "today" the period, then to start out in the calculation of the RSI, we need to add together all of the positive price changes over the period. Let's see an example of the price changes over a 14 day period for the share price of a UK share, Radstone Technology, for the trading days between 21 October 2004 to 9 November 2004.

-7

14.8

-1.3

0.5

2.5

2.5

-15

0

4.25

-3.25

-1

3

-1

-1

Adding up all of the positive changes gives 14.8+0.5+2.5+2.5+4.25+3. Which is a total of 27.55. We now need to divide this "up total" by the number of days in our period, in other words, in our example we need to calculate 27.55÷14. This gives us an average "up" price change of 1.9678571428571428571428571428571 .

Now, a similar calculation needs to be done with all the negative changes which occurred during the period. We need to ignore the negative sign when doing this calculation, so the total is 7+1.3+15+3.25+1+1+1, giving a result of 29.55. Similar to the "up total", we need to divide this "down total" by the number of days in our period. So, using our 14 day period, we calculate 29.55÷14, which gives an average "down" price change of 2.1107142857142857142857142857143 .

Once we've got the average "up" price change and the average "down" price change, we can calculate the RS, which is the Relative Strength ...not yet the RSI but we're getting nearer! The RS is the average "up" price change divided by the average "down" price change. So in our example the RS is 1.9678571428571428571428571428571 ÷ 2.1107142857142857142857142857143, giving a RS value of 0.93231810490693739424703891708974.

Finally we can now apply the final calculation:
RSI = 100 - (100÷(1+RS))
Which gives, in our example, an RSI of 100 - (100÷(1+0.93231810490693739424703891708974)), which is 48.248686514886164623467600700507.

RSI interpretation

RSI can also be used to identify when a stock or share is overbought or oversold. With a 14 day period RSI, many analysts consider that if the RSI drops to below 30 mark, it indicates that the stock is oversold, so is a possible buy signal. Converssely, if the RSI rises to above 70, the stock may be overbought and it is worth considering selling. If a shorter period (for example 8 days) is used, you may wish to use a lower level (for example 20 to 25) as an oversold level, and a higher level (eg 75 to 80) as an overbought indicator. The lower number of days used for the period, the more volatile the RSI will be.