Info 1: Relative strength index definition
Info 2: Relative strength index works
Info 3: RSI value vs RSI percentage
Info 4: example of RSI
Opening information:
Relative strength index breaks into two words relative, strength, and index. Relative means comparative, strength means stability, and index means alphabet list. The relative strength index is a tool for finding a comparative strength in a list.
So now let’s have the relative strength index (IRS), how the IRS works, and what is the difference between IRS value and IRS percentage, finally one clear example of the IRS Indicator.
Info 1: relative strength index definition
Mr.Nison is a stock Investor, who trades public securities in a short-term time frame, he holds three kinds of Securities which that’s each of which is traded with a technical tool that he used for all the entry positions.
The purpose of his Investment trading takes place on the average growth of the last 20-day period and determines the trade position on the opposite side of his trading. His trading tools completely track the 20 days of average growth of gain and loss of stocks, commodities, and Currencies.
Depending on his analysis using a technical tool he takes a position in the Securities with Overall trend value, if the stock constantly reduced for long days of 20 trading sessions.
He placed the trade on the buy side to go long as per the signal of his technical tools, if the overall average trend growth had increased, he would taken the position of going short in the trade.
His decision to speculate based on what is the average past trend shown by his technical tools. Here Mr. Nison used a tool for trading called as relative strength index.
So now let’s dive into how the relative strength index Indicators work and are involved in the public market trade for investors.
Info 2: relative strength index works
The relative strength index doesn’t represent any fixed thing or object, instead, it’s a tool that is used to track the average growth or loss over a certain amount of period.
The purpose of the relative strength index (RSI) is to calculate the overall gains or losses of the past period based on the investor or speculator’s wish. By default, the RSI is calculated for the 14 days.
However this sum takes place by adding the total gains over the past 14 days, this gain would be taken each day for the last 14 trading period sessions by subtracting each day’s previous closing price from the Current closing price.
Among the 14 days, any of the trading sessions would had no gains indeed it’s had a loss, it’s marked as Zero gains on that day and only adds the gains days for the past 14 days. This concluded the total gain of the 14 days but divide the 14, it shows average gains over the 14 days.
On the other hand, this same calculation takes place with days end with loss by subtracting the previous closing market price and the recent Current market closing price for the last 14 days.
By adding all the loss days over the past 14 days it shows the total loss of changes over the period in specific stock, and dividing with 14 demonstrates the average loss over the 14 days.
We know the average 14-day gain and average 14-day loss, and dividing this average gain and loss illustrates the answer of what the real average gains over the past 14 trading session period after sum up the loss days too in 14-day periods.
This same calculation would be taken in all RSI Indicators to determine the final value, but it is shown in percentage with a separate box.
Most people confuse the relative strength index RSI value and percentage, so let’s jump into the key difference in it anyway.
Info 3: RSI value vs RSI percentage
RSI value is the final value we arrive at after dividing the average gain and an average loss of a certain amount of period, it’s not a percentage value.
To convert the final value into a percentage of growth, it’s elaborate on how much certain stocks or securities would be strength grown over the past certain amount of period.
So to convert the RSI final value to percent, add 1 with the final value and a dividend with 100 it’s clarify how many times the Final value would go into the 100 and subtract that 100 afterward to arrive at a percentage.
To make you more clear about the whole calculation let’s look into one brief example below.
Info 4: example of RSI indicator
Say your stock trader which trading stock E using the RSI indicator, So your RSI indicator works like this By subtracting the previous day’s closing price and recent closing price for 7 days and RSI has different calculations of gain and loss days.
Gain:
Day 1: $3
Day 3: $2
Day 5: $4
Day 7: $2.6
Loss:
Day 2: $2.4
Day 4: $5
Day 6: $3
Total gain for 7 days = 11.6
Average gain for seven days = 11.6/7 = $1.65
Total loss for 7 days = 10.4
Average loss for seven days = 10.4/7 = $1.48
Average gain after the loss substitution for 7 days = 1.65/1.48 = $1.11
The final value of the average move of stock E over the past 7 days is $1.11
To convert this 1.11 dollars as a percentage add the 1 and divide with 100 = 100/ ( 1+1.11) = 47.27
This 47.27 is not a percent value indeed subtracted the 100 with 47.27 because we had divided the 100 with the final value to arrive at percentage = 100 – 47.27 = 52.72
Here the RSI determined that the indicator line would move at 52.72 percent in stock B.