Computation of RSI

TradingFunda

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Staff member
#1
RSI is calculated using a two-step process.

First, average gains and losses are identified for the specified period.

For instance, if you want to calculate the 14-day RSI (which is the default setting in almost all the trading platforms) and suppose the stock went UP on nine days and DOWN on five days, the absolute gains (stock’s closing price on a given day minus closing price on the previous day) on each of these nine days are added up and divided by 14 to get the average gains.

Similarly, the absolute losses on each of the five days are added up and divided by 14 to get the average losses.

The ratio between these values (average gains / average losses) is known as relative strength (RS).

To make sure that the RSI always moves between 0 and 100, the indicator is then normalized using the following formula:

RSI = 100 − (100 / (1+RS))

where RS = Average gains / Average losses
 
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