The Relative Strength Index or RSI is a popular momentum oscillator developed by J. Welles Wilder in the 1970s. The RSI compares the magnitude of a market's recent gains to the magnitude of a market's recent losses.
A simple formula calculates this price action into a number between 1 and 100. Markets with RSIs closer to 1 are considered oversold. Markets with RSIs closer to 100 are considered overbought.
RSI = 100 - (100/(1 + RS))
RS = average of x days up closes / Average of x days down closes
Below is an example of the Relative Strength Index, with the average period length set to 2 days.
Go deeper. The above definition of the Relative Strength Index comes from the book, High Probability ETF Trading, by Larry Connors and Cesar Alvarez.
Learn more about the Relative Strength Index from J. Welles Wilder's original text.
