The relative strength index (RSI) created by J. Welles Wilder is a momentum indicator that can be used to measure overbought and oversold condition for a security. By evaluating the current price of a security relative to the past 14-closing prices, an analyst can determine if the price of the security is relatively high or low compared to the recent distribution of prices.
The RSI generates an index by creating a formula that computes the index that creates a value between zero and 100.
RSI = 100 – 100 / ( 1 + RS )
RS = Average Gain / Average Loss
The default for the relative strength index is 14-units, which include any time period such as daily, weekly, monthly or intra-day.
The RSI is mainly used as an overbought and oversold indicator. Again the default for the RSI creates an overbought condition when the index moves above a reading of 70, and generates an oversold condition when the index moves below a 30 print.
Intra-day price points are generally more volatile over 14-periods than daily or weekly points which make the RSI a solid tool to use for picking overbought and oversold levels. The default levels of 30 and 70, as well as hourly data can be played with to come up with a system that fits an investor’s comfort level but regardless of the levels used, the RSI is a robust technical indicator.