Formula used to calculate RSI:
RSI = 100 – [100 / ( 1 + (Average Gain / Average Loss ) ) ]
In above formula, Average Gain means Average of Upward Price Change & Average Loss is Average of Downward Price Change. Another point, in this formula average losses considered as positive value. The default setting used for the RSI is 14 days period for daily charts. Which is also Known as ‘look-back period. In case you are analyzing hourly chart default period is 14 hours.
Let us Understand this through an Example: Suppose there is a stock which is trading at 79 on day 0, So the basic RSI indicator calculation will happen like this:
From the above data, let us calculate average gain/loss:
Average Gain – 24/14 =1.714 (14 is the default period)
Average Loss – 16/14 = 1.142
as per RSI formula the calculation will be:
RSI = 100 – [100 / ( 1 + (Average Gain / Average Loss ) ) ]
RSI = 100 – [100 / ( 1 +(1.714/1.142) ) ] ,
= 100 – [100 / ( 1 + 1.500) ]
= 100 – 39.99
RSI = 60.01
Of course, above example is just for an illustration purpose there is no point sitting and calculating the RSI. It will be available as a technical indicator inside your trading tool given to you by your broker.