Index - RSI

Relative Strength Index (RSI) is an oscillating indicator developed by J. Welles Wilder to evaluate the strength of the current market. It indicates and identifies overbought and oversold conditions of the market and help us making our trade decision better.

• RSI is shown on the charts as a line graph at * the bottom and it ranges from 0 to 100. There are two critical levels (30 and 70) that are used generally to indicate oversold and overbought market conditions.

• RSI line at 30 level or lower indicates oversold conditions and traders see this as an opportunity to make their buy entries because market is likely to change trend and move upward.

• RSI line at 70 level or lower indicates overbought conditions and traders see this as an opportunity to make their sell entries because market is likely to change trend and move downward.

• These levels are not trademark and traders can use their own tweaking to adjust these levels like 80 and 20. Personally, I like to use 68 and 32 as overbought and oversold criteria.

How to calculate the RSI index.

RSI = 100 - [100/1+RS]
RS in this formula represents the ratio of average gains / average losses over a certain period of time. The time period can be different and depends upon traders choice. By default, RSI time length is 14 which means RSI will change average value after 14 intervals. These intervals will be 14 hours if we have applied RSI indicator on hourly chart while these intervals will be 14 days if we have applied the indicator on daily chart.