Calculation formula for RSI

2023-06-28
Summary:

The Relative Strength Index (RSI) is used to help investors determine the overbought and oversold status of the market. By calculating the average value of price fluctuations, RSI can quantify the comparison of forces within the market.

In futures trading, the Relative Strength Index (RSI) is one of the most popular technical tools. Many stock trading software programs also provide RSI charts, and many people closely monitor this technical indicator. The RSI compares the relative strength between price increases and decreases over a period of time. In RSI research, 6 days, 12 days, and 24 days are the three most commonly used time parameters.

Calculation of RSI

The calculation method of RSI is to first accumulate the sum of the price increases and price decreases within a certain period of time and then calculate the ratio of the two. In the calculation process, generally only the closing price is used as the price data. Its calculation formula is: RSI = 100 [100/(1+RS)]. Among them, RS is the average of the increase in price during the period and the average of the decrease in price during the period.


Therefore, when calculating the 6-day RSI, we first add up the increase in closing prices that have increased during these 6 days (in the same way as closing prices) and then divide the sum by 6. Then, perform the same calculation for the days of decline. From these two values, the relative force value RS is obtained. Finally, we substitute the value of RS into the formula for RSI. The RSI formula converts the value of RS into an exponential form and sets the value range of the index between 0 and 100.


The Relative Strength Index (RSI) is a commonly used technical indicator used to measure the overbought and oversold status of prices. The calculation of RSI is based on price changes over a certain time period.


The calculation steps for RSI are as follows:

1. Firstly, calculate the gain and loss of the price. An increase indicates a price change where the closing price of the day is higher than the previous day's closing price, while a decrease indicates a price change where the closing price of the day is lower than the previous day's closing price.


2. Then calculate the average gain and average loss. The average increase refers to the average of all increases within a certain period of time, while the average decrease refers to the average of all decreases within a certain period of time. Usually, a certain time period (such as 14 days) can be selected initially, and then the average increase and decrease can be calculated.



3. Next, calculate the relative strength. Relative strength is the ratio of the average increase divided by the average decrease.

Relative strength=average increase/average decrease


4. Finally, calculate the RSI based on relative strength. RSI is the result of converting relative intensity into indicator form.

RSI = 100 (100/(1+relative strength))

The value range of the RSI is usually between 0 and 100. When the RSI exceeds 70, it indicates that the market is overbought and there may be a price correction. When the RSI is below 30, it indicates that the market is oversold and there may be a price rebound. Investors can make buying or selling decisions based on the value and trend of the RSI. It should be noted that RSI is only a reference tool, and comprehensive analysis based on other indicators and market conditions can more accurately determine price trends.


Application of RSI

The two main uses of RSI are to form overbought and oversold indicators and as a tool for monitoring mutual deviations.


Composition of overbought and oversold indicators

The method of using RSI as an overbought or oversold indicator is to indicate that the market is in an overbought state when RSI approaches the upper boundary of its value range (i.e., when it is above 70 or 80). In such a situation, the market may become relatively fragile, prone to triggering a downward decline process, or about to enter a horizontal adjustment stage. On the contrary, when RSI is at the lower boundary of its value range (usually below 30 or 20), it is considered that RSI reflects an oversold state. In such an environment, the market may form a short-buying and short-closing market.

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