RSI - Relative Strength Index

One of the most useful and popular momentum oscillators is the Relative Strength Index(RSI).It was developed by J.Welles Wilder in 1978.The RSI oscillator determines the strength in the prevailing trend by comparing the magnitude of a stock's recent gains to the magnitude of the recent losses.The RSI is plotted on a range of 0 to 100.Between 0 to 30 is the 'oversold' zone.When the RSI declines to this zone, it means that the selling might have been overdone and an upward reversal could be around the corner.However, the RSI can stay in the oversold region for prolonged duration.
Similarly, above 70 and 100 is the overbought zone.The RSI reaching this zone implies that the stock may be getting overvalued and a pullback or correction is likely soon.
It is, therefore, not appropriate to initiate long positions based on the observation that the RSI has reached the oversold territory.Similarly,short positions cannot be taken as soon as the RSI reaches the overbought region.A trend reversal ought to be confirmed by a reversal in the RSI.
The RSI is calculated using a formula, as follows:
RSI=100-(100/1+RS), where RS= Average of up day's closes/Average of down day's closes.The number of days typically used for calculating the RSI is 14 days.While calculating for the weekly time frame 14 weeks data is used.