The Relative Strength Index (RSI) is a popular oscillator used by commodity traders. It was first introduced by J. Welles Wilder in an article in Commodities (now known as Futures) magazine in June, 1978. Step-by-step instructions on calculating and interpreting the RSI are also provided in Mr. Wilder's book, New Concepts in Technical Trading Systems.
The name "Relative Strength Index" is slightly misleading as the RSI does not compare the relative strength of two securities, but rather the internal strength of a single security. A more appropriate name might be "Internal Strength Index." It is calculated using the price, and is used as an oscillator showing overbought and oversold levels. The RSI compares the upward price movement to downward price movement over the specified timeframe, and displays the result as a momentum line oscillating between 0 and 100.

The basic formula for the RSI is:

The equation is RSI = 100 - 100 / (1 + RS) where RS = (total gains / n) / (total losses / n) and n = number of RSI periods. The value can range from 1 to 100.

When the RSI reaches 30 or below, the market is in oversold terrritory and when it reaches 70 or above, it is in overbought terrritory. Divergencies between the RSI and price are a forwarning of a change in trend, as illustrated in the graph below.