RSI

Relative Strength Index. A popular technical indicator developed by Welles Wilder. It addresses erratic price movements in the markets by smoothing prices using the following formula:

RSI = 100 – (100 / (1+ (Average of n up closes / average of n down closes)))

The default value is 14 but 9 may also be used. RSI is bounded between 0 and 100. When the oscillator moves above 70 it is considered overbought and a reversal warning is indicated. If there is a negative divergence between the price and the RSI, then a potential sell indication is in place. When the oscillator moves below 30 it is considered oversold and hence a reversal alert is indicated. If there is a positive divergence between the price and the RSI, a possible buy indication may be in place.