Technical Indicators & Analysis

RSI Formula: How to Calculate the Relative Strength Index

August 7, 2025 Comments Off on RSI Formula: How to Calculate the Relative Strength Index

Introduction

The Relative Strength Index (RSI) is a momentum oscillator used in technical analysis to measure the strength of price movements. Understanding the RSI Formula helps traders identify overbought and oversold conditions in a stock or asset, making it a valuable tool for market timing.

RSI Formula

The RSI is calculated using the following formula:

RSI=100−1001+RSRSI = 100 – \frac{100}{1 + RS}

Where RS (Relative Strength) is calculated as:

RS=AverageGainovernperiodsAverageLossovernperiodsRS = \frac{Average Gain over n periods}{Average Loss over n periods}. This forms the basis of the RSI Formula.

  • The default period for RSI is 14 days, but traders can adjust it for different timeframes.
  • The values range from 0 to 100, with key levels at 30 (oversold) and 70 (overbought).

Step-by-Step RSI Calculation

  1. Calculate the daily price changes (positive = gain, negative = loss).
  2. Compute the average gain and average loss over the chosen period. This step is crucial for the RSI Formula.
  3. Divide the average gain by the average loss to get RS.
  4. Apply the RSI formula to compute the final RSI value.

How to Interpret RSI

  • RSI above 70: Overbought condition – a potential sell signal.
  • RSI below 30: Oversold condition – a potential buy signal according to the RSI Formula.
  • RSI between 50-70: Indicates strong bullish momentum.
  • RSI between 30-50: Suggests bearish momentum.

Example of RSI in Trading

A trader might:

  • Enter a buy trade when RSI moves above 30, confirming upward momentum.
  • Enter a sell trade when RSI falls below 70, indicating weakening strength.
  • Look for RSI divergences, where price and RSI move in opposite directions, signaling trend reversals. Traders often rely on the RSI Formula for such analyses.

Advantages of RSI

  1. Easy to Use: Simple to calculate and interpret thanks to the clear RSI Formula.
  2. Works Across Different Markets: Useful in stocks, forex, and cryptocurrency trading.
  3. Combines Well with Other Indicators: Often paired with MACD, Moving Averages, and Bollinger Bands.

Limitations

  • False Signals: RSI can remain overbought or oversold for long periods in strong trends.
  • Should Be Used with Confirmation Tools: Combining RSI with volume analysis or trend indicators improves accuracy.

Conclusion

The RSI Formula is a powerful tool for traders looking to measure market momentum and identify potential entry and exit points. When used alongside trend indicators and support/resistance levels, RSI enhances trading strategies and improves decision-making.