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Getting it down on `paper`

Calculation of RSI

                  100
    RSI = 100 - --------
                 1 + RS

    RS = Average Gain / Average Loss

    Average Gain = [(previous Average Gain) x 13 + current Gain] / 14
    First Average Gain = Total of Gains during past 14 periods / 14

    Average Loss = [(previous Average Loss) x 13 + current Loss] / 14
    First Average Loss = Total of Losses during past 14 periods / 14 

    Note: "Losses" are reported as positive values.

To start the running calculation, the First Average Gain is calculated as the total of all gains during the past 14 periods divided by 14. Similarly, the First Average Loss is calculated as the total magnitude of all losses during the past 14 periods divided by 14. The next values for the “averages” are calculated by taking the previous value, multiplying it by 13, adding in the next Gain (or Loss), and then dividing by 14. This is Wilder’s modified “smoothing” technique in action.

When the Average Gain is greater than the Average Loss, the RSI rises because RS will be greater than 1. Conversely, when the Average Loss is greater than the Average Gain, the RSI declines because RS will be less than 1. The last part of the formula ensures that the indicator oscillates between 0 and 100. Note: If the Average Loss ever becomes zero, RSI becomes 100 by definition.

Stockcharts.com

 

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