How is the RSI calculated?

The Relative Strength Index (RSI) is calculated using the concept of relative strength, which compares the average gains and average losses over a specified period, typically 14 periods. The correct calculation utilizes the formula where RS represents the average of upward price changes (AU) divided by the average of downward price changes (AD). This is crucial because it provides a measure of momentum by assessing how much gain is averaged compared to average losses.

The RSI is then derived from this RS value using the formula:

[ \text{RSI} = 100 - \left( \frac{100}{1 + RS} \right) ]

This computation helps traders understand whether a stock is overbought or oversold. The focus on gains and losses allows the RSI to effectively indicate market conditions.

The other choices do not reflect the correct methodology for calculating the RSI. They either misrepresent the relationship between upward and downward movements or provide calculations unrelated to the RSI's objective of comparing average gains and losses. Therefore, the understanding of ratios of average gains to average losses is key to grasping how RSI signals momentum in the market.