This implies that the RSI can also be used to identify the overbought/oversold levels in a counter. Overbought/oversold levels: The RSI value will always move between 0 and 100 the value will be 0 if the stock falls on all 14 days, and 100, if the price moves up on all the days). RSI = 100 - 100 / (1+RS*) * RS = Average gains / Average losses To make sure that the RSI always moves between 0 and 100, the indicator is normalised later by using the formula given below: The ratio between these values (average gains / average losses) is known as relative strength (RS). Similarly, the absolute losses on each of the five days are added up and divided by 14 to get the average losses. The absolute gains (stock’s closing price on a given day - closing price on the previous day) on each of these nine days are added up and divided by 14 to get the average gains. For instance, if you want to calculate the 14-day RSI- you can consider any time period, but the 14-day RSI is the most commonly used-suppose the stock went up on nine days and fell on five days. First, the average gains and losses are identified for a specified time period. This means that the RSI indicator only measures the stock’s internal strength (based on its past) and should not be confused with its relative strength, that is compared with other stocks, market indices, sectoral indices, etc.Ĭomputation: The RSI is calculated using a two-step process. The relative strength index (RSI), one of the most popular technical indicators, is computed on the basis of the speed and direction of a stock’s price movement.

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