Relative Strength Index - RSI

What

The RSI compares the magnitude of a stock's recent gains to the magnitude of its recent losses and turns that information into a number that ranges from 0 to 100. It takes a single parameter, the number of time periods to use in the calculation.

How

                EMA (N) of U

RS =      ______________

                EMA (N) of D

Where U = close of today – close of yesterday

And D = close of yesterday – close of today

N is the number of periods – usually 14

EMA is an Exponential Moving Average

This is converted to Relative Strength Index between 0 and 100

                            100

RSI = 100 –   ____________

                         1 + RS

When

The RSI ranges from 0 to 100. An asset is deemed to be overbought once the RSI approaches the 70 level, meaning that it may be getting overvalued and is a good candidate for a pullback. Likewise, if the RSI approaches 30, it is an indication that the asset may be getting oversold and therefore likely to become undervalued. The principle is that when there's a high proportion of daily movement in one direction it suggests an extreme, and prices are likely to reverse. Levels 80 and 20 are also used, or may be varied according to market conditions.

Divergence in the RSI indicator with respect to price will often indicate that a turn in price is imminent. Similarly failure swings provide an indication that the market may be ready to turn. This occurs when the market makes a new peak high (low) but the indicator fails to make a new peak high (low).