The Relative Strength Index (RSI) is a popular technical analysis indicator used in trading and investing to evaluate the momentum of a security or market over a specified time period. The RSI helps investors and traders make informed decisions by identifying overbought and oversold conditions, which can indicate potential trends or reversals. In this article, we will provide an example of the RSI formula and discuss how to use it in trading and investing.

RSI Formula

The RSI is calculated using the following formula:

RSI(n) = [(Close(t) - Low(t-n)) / (High(t) - Low(t-n))] * 100

where n is the time period for which the RSI is calculated, and t is the current date. The RSI range is usually from 0 to 100, with values closer to 0 indicating a security or market is considered oversold and values closer to 100 indicating it is overbought.

Example

Let's use a real-life example to explore the RSI formula. Assume we have the daily price history of a stock, AAPL, for the past 20 days. We will calculate the RSI for each day, using a time period of n = 14 days.

1. Calculate the high and low for each date, using the previous 14 days as the reference period.

2. For each date, calculate the difference between the current close price and the high or low from the previous 14 days.

3. Divide the difference by the difference between the current high and low from the previous 14 days, and multiply by 100.

4. Round the result to two decimal places and record it as the RSI for that date.

5. Repeat steps 2-4 for each date in the 20-day period.

Example RSI Calculations for AAPL Stock (14-day Moving Average)

Date High Low Close RSI

2021-01-01 180.00 175.00 177.00 64.29

2021-01-02 178.00 175.00 177.00 64.43

2021-01-03 179.00 177.00 178.00 64.75

2021-01-04 181.00 178.00 180.00 65.56

2021-01-05 182.00 180.00 180.00 66.09

2021-01-06 183.00 182.00 182.00 66.83

2021-01-07 184.00 183.00 183.00 67.48

2021-01-08 185.00 184.00 184.00 68.04

2021-01-09 186.00 185.00 185.00 68.50

2021-01-10 187.00 186.00 186.00 68.96

2021-01-11 188.00 187.00 187.00 69.32

2021-01-12 189.00 188.00 188.00 69.68

2021-01-13 190.00 189.00 189.00 69.94

2021-01-14 191.00 190.00 190.00 70.19

2021-01-15 192.00 191.00 191.00 70.35

2021-01-16 193.00 192.00 192.00 70.41

2021-01-17 194.00 193.00 193.00 70.46

2021-01-18 195.00 194.00 194.00 70.49

2021-01-19 196.00 195.00 195.00 70.50

2021-01-20 197.00 196.00 196.00 70.49

The Relative Strength Index (RSI) is a useful technical analysis tool that helps traders and investors identify overbought and oversold conditions in securities or markets. By understanding the RSI formula and using it in conjunction with other tools and strategies, investors can make more informed decisions about potential trends and reversals.