RSI or Relative Strength Index is an extremely popular indicator used in the intra-day market. RSI is a majorly used to measure the velocity and the change of directional price movements in order to give a clear measure of the strength of a trend. It was first developed by J. Welles Wilder, a technical analyst.
RSI is the indicator used to identify overbought and oversold conditions of a particular stock in the market.
RSI has a range of 0 to 100.
While using RSI for trading, readings below 30 indicate oversold market conditions while that above 70 indicate overbought conditions.
However, these are not absolute values as RSI indicator only measures the stock’s internal strength (based on its past) and does take into account other factors like other stocks, market indices, sectoral indices, etc in its calculation
A trader always analyzes their own stocks keeping in mind the other circumstantial factors and determine the overbought and oversold RSI numbers. This will help investors determine their investment strategy.
The general opitimized formula for Relative Strength Index calculation is given as:
RSI = 100 – 100 / (1+RS*) * RS = Average gains / Average losses