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Developed by Welles Wilder, the RSI is one of the most famous and most used indicator in the world of Technical Analysis. Since its publishing it 'New Concepts in Technical Analysis', it is used by countless traders worldwide to discover period where price is overbought and oversold.

Calculation
The Relative Strength Index calculates the average gain and average loss of the security, and when the ratio between the two reaches extremes it is identified as overbought or oversold. The RSI oscillates from 0 to 100, where 30 is the oversold level and 70 is the overbought level.

Its exact calculation formula is the following:
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

Simple OverBought \ OverSold

A simple method of trading the RSI is waiting for price to reach an oversold level and break it - for long entry. A opposite approach is to wait for price to enter an overbought area and than go down to the normal zone - for short entries.

However, in strong trends the RSI continuously alerts overbought and oversold areas, usually falsely. It is advised that trader use trend-filters to filter out phases of strong trend in which the Relative Strength Indicator is usually weaker in signaling trades.

 Absolutely NO THINKING is needed, just buy when Blue and sell when Red!

Mild Signals
In the famous book, 'Science of Technical Analysis' by Thomas De Mark, the author describes a more reliable way of trading the Relative Strength Index - the mild signals. De Mark claims that if price touches the RSI overbought\oversold levels for a short period and than bounces immediately - it is a much stronger signal.

De Mark's studies prove that this method is correct and is able to generate much reliable reversal signals. Testings also show that this trading attitude generates better signals at many other oscillators, such as the Commodity Channel Index and Stochastic. The quick bounce of price confirms that the signal is strong as price reacts quickly and moves in the direction of our signal.

Center line Cross

It is possible to use the RSI in a trend-following method - waiting it to cross its Center line. Crossing of the 0-level from below signals a long entry while crossing the 0-level from above signals a short entry. It is a trend-following approach, so expect lags in entry and exit.

In conclusion, the Relative Strength Index is a traditional, orthodox indicator and it well deserves its place in the Hall of Fame of indicators.