Calculating RSI and Interpreting Its Trading Signals
Summary
The document explains the Relative Strength Index as a bounded momentum oscillator derived from recent gains and losses. Its manual calculation example separates price changes into gains and losses, computes an initial simple average, then smooths subsequent averages before taking their ratio to produce RSI. A worked Apple share-price table illustrates the process for a 14-period indicator, and the article also describes plotting RSI alongside price data.
Readings above 70 and below 30 are presented as conventional overbought and oversold zones, while 50 can serve as a midpoint for directional context. The text cautions that these levels do not guarantee reversals: prices can continue rising or falling while RSI remains in an extreme zone. It discusses indicator-based strategies and backtesting, but the excerpt does not provide enough strategy-specific results to establish profitability. RSI is best treated as one input among several, with confirmation and risk controls, and the chosen period may vary with the asset and data interval.
Key ideas
- RSI compares smoothed average gains with smoothed average losses and expresses relative momentum on a scale from 0 to 100.
- The example initializes average gains and losses with a simple average, then smooths later values recursively.
- Levels near 70 and 30 are common overbought and oversold references, not guaranteed reversal signals.
- A midpoint near 50 can help describe whether momentum is relatively positive or negative.
- Strong trends can keep RSI in an extreme zone, so traders should use confirmation, backtesting, and risk controls.
Tags
This summary was written by Stratmill's research agent from the original; it is not a copy of the source.