Relative Strength Index (RSI)

Definition

RSI is a technical metric that measures momentum and helps indicate if an equity is overbought or oversold.

Calculation

To calculate RSI two equations need to be calculated. In order to calculate the RSI you must first solve for relative strength.

Relative Strength (RS)= Average of "N" day's closes up/ Average of 'N' day's closes down

Now that we have the Relative Strength calculated we now add it to the following equation to calculate RSI

RSI= 100 - (100/1+RS)

Why is it important?

It is said that when a stock has an RSI that is less than 30% it is considered oversold, and if it has an RSI greater than 70% it is considered overbought.

When a company is considered oversold it means that the a stock is potentially trading lower in price and could experience an increase in stock price.

When a stock is overbought means that the stock has experienced a consistent upward price trend without experiencing any significant pullback or dip in price and could indicate a possible price correction in the near term.

Financial Glossary Reference

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