Relative Strength index (RSI) – Complete Explanation & How to use RSI for Profits

Relative Strength index (RSI) is a concept which can be considered as an artificial intelligence based index. It is a graph which is readily used in trading and investment banking. Relative Strength index (RSI) is a momentum indicator which was developed by Welles Wilder (technical analyst) long back.

The index Relative Strength index (RSI) compares the magnitude of the recent losses and gains in prices. This is done to indicate if the stock is overpriced, under priced or well-priced i.e. if the security is overbought or oversold.

Relative Strength index (RSI)
A Random RSI Graph as shown in Indian Broker

Relative Strength index (RSI) : The Actual Formula

The formula used behind calculating Relative Strength index (RSI) is :

RSI = 100 – 100 / (1 + RS)

Where RS = Average gain of up periods during the specified time frame / Average loss of down periods during the specified time frame.

Relative Strength index (RSI) : How to Calculate Threshold

When we look at Relative Strength index (RSI) graph, it is traditionally accepted that a value or score of 70 and above is considered overbought. While anything beyond score of 30 and below is considered as oversold.

Relative Strength index (RSI) is just an indicator which can be used for making trading decision. However, in most of the cases where external factors comes into picture, Relative Strength index (RSI) is merely a graph.

Always remember that artificial intelligence or technical analysis based trading can only be used as indicators to assist with actual trading instincts. One has to be careful enough to make decision in marketplace.