What is the RSI indicator?

The Relative Strength Index (RSI) is a popular technical analysis indicator used to measure the strength of a security's price action. It is an oscillator that fluctuates between 0 and 100, providing insights into whether a security is overbought or oversold. The RSI is calculated by comparing the average gains and losses of a security over a specified period of time, typically 14 days.

To calculate the RSI, the following steps are taken:

1. Calculate the average gain and average loss for the specified period. The average gain is the sum of all gains during the period divided by the number of periods, while the average loss is the sum of all losses during the period divided by the number of periods.

2. Calculate the Relative Strength (RS) by dividing the average gain by the average loss.

3. Calculate the RSI by applying the following formula: RSI = 100 - (100 / (1 + RS))

The RSI is often plotted on a chart alongside the security's price action. When the RSI rises above 70, the security is considered overbought, which means that the security's price may be due for a correction or reversal. When the RSI falls below 30, the security is considered oversold, which means that the security's price may be due for a bounce or reversal.

Here is an example of RSI calculations using a hypothetical security with daily closing prices:

Day 1: closing price = $50

Day 2: closing price = $55

Day 3: closing price = $52

Day 4: closing price = $48

Day 5: closing price = $45

Day 6: closing price = $51

Day 7: closing price = $53

Day 8: closing price = $55

Day 9: closing price = $60

Day 10: closing price = $57

Average gain = (55-50 + 0 + 0 + 0 + 6 + 2 + 0 + 5 + 0) / 10 = 1.8

Average loss = (0 + 0 + 3 + 4 + 3 + 0 + 0 + 0 + 0 + 2) / 10 = 0.2

Relative Strength (RS) = Average gain / Average loss = 1.8 / 0.2 = 9

RSI = 100 - (100 / (1 + RS)) = 100 - (100 / (1 + 9)) = 90.9

In this example, the RSI is 90.9, which suggests that the security is overbought and may be due for a correction or reversal.

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