What is RSI? RSI is a momentum oscillator that compares stock’s or currencies magnitude of recent gains with magnitude of recent losses. It ranges between fixed values – 0 to 100 (where values usually move between 30 and 70). RSI is based on ratio of the average upward movements and average downward movements in a given period of time. Higher than 70 means usually overbought environment and below 30 oversold environment.
How is RSI calculated exactly? We take some sort of period ( one of the most popular one is 14 days ), we calculate average gain (we divide the total gains sum to total loss sum) and average loss (we divide the total loss sum to total gains sum) and now we can get the first RS value by dividing average gain to average loss. If average gain is higher than average loss, RSI rises above 1; if the average loss is higher than average gain, the RSI declines.
RSI rising above 30 is considered bullish and RSI falling below 70 is considered bearish signal.