Trading Defined
Indicators and ToolsIntermediate

Relative Strength IndexRSI

The Relative Strength Index is an oscillator from 0 to 100 that compares recent gains with recent losses to gauge the momentum of a move.

The RSI answers a simple question: over the last few periods, have the up-moves or the down-moves been bigger?1 It turns that into a number between 0 and 100. High readings mean gains have dominated, low readings that losses have. Traders use it to spot stretched moves, fading momentum and divergences — and they regularly lose money by treating “overbought” as “about to fall”. This entry shows the formula, the classic signals and their limits.

Category
Indicators and Tools
Reading time
6 min
Also called
RSI indicator, RSI 14, Overbought RSI
Updated

RSI in plain words

The RSI, developed by J. Welles Wilder, measures the speed and size of recent price changes and moves between 0 and 100.2 If a stock has mostly risen over the last 14 days, the RSI is high; if it has mostly fallen, it is low; if gains and losses were similar, it sits near 50.

By tradition, readings above 70 are called overbought and below 30 oversold.2 That means the recent move has been strong — not that it has to reverse.

How to calculate and read the RSI, step by step

  1. Pick the period

    The standard setting is 14 periods. Shorter settings make the RSI jumpier; longer ones smoother.

  2. Average the gains and losses

    Over the period, average the up-moves (average gain) and the down-moves (average loss, as a positive number). Wilder’s method then smooths both averages each new period.

  3. Apply the formula

    RSI = 100 − 100 ÷ (1 + average gain ÷ average loss).2 The ratio of average gain to average loss is called RS.

  4. Read the zones in context

    Above 70 is traditionally overbought, below 30 oversold, though the levels can be adjusted to suit a market, for example 80 and 20.2

  5. Use the trend ranges

    In uptrends the RSI tends to stay roughly between 40 and 90, with 40–50 acting as support; in downtrends between 10 and 60, with 50–60 acting as resistance.2

  6. Look for divergences and failure swings

    A new price high or low that the RSI does not confirm is a divergence and can warn of a reversal.2 Treat it as a warning, not a trigger.

Worked examples

Example 1 — Calculating RSI

Formula

Over the last 14 days a stock’s average gain on up days is $1.20 and its average loss on down days is $0.80.

Example 1 — Calculating RSI — calculation
RS = average gain ÷ average loss$1.20 ÷ $0.80 = 1.5
RSI = 100 − 100 ÷ (1 + RS)100 − 100 ÷ 2.5
RSI60

Gains have been 1.5 times the size of losses, which gives an RSI of 60 — moderately strong, nowhere near overbought.

Example 2 — The next day, with Wilder smoothing

Smoothing

The next day the stock rises $2.00. Wilder’s smoothing keeps 13/14 of each old average and adds 1/14 of the new move.

Example 2 — The next day, with Wilder smoothing — calculation
New average gain($1.20 × 13 + $2.00) ÷ 14 ≈ $1.257
New average loss($0.80 × 13 + $0) ÷ 14 ≈ $0.743
RS≈ 1.692
RSI≈ 62.9

One strong day moved the RSI from 60 to about 62.9. Smoothing means a single day rarely swings it dramatically on the standard setting.

Example 3 — Selling “overbought” in a strong trend

Trend

A stock in a strong uptrend reaches RSI 72 at $80. A trader shorts it as overbought. Over the next three weeks the RSI stays between 65 and 82 while the price climbs to $92.

Example 3 — Selling “overbought” in a strong trend — calculation
Short entry$80
Price three weeks later$92
Loss per share−$12

In strong trends the RSI can stay overbought or oversold for long periods.2 Overbought describes the past move, not the next one.

Figure 1

Price and its 14-period RSI

Price with a 14-period RSI below itThe upper panel shows the price; the lower panel shows the RSI on a scale from 0 to 100, with dashed lines at 70 and 30. The RSI rises above 70 near the price peaks and falls towards or below 30 near the troughs, turning before or as the price turns.PriceRSI (14)70 overbought5030 oversoldtime →
The RSI rises above 70 near the price peaks and falls towards 30 near the troughs. The 50 line separates periods when gains dominated from periods when losses did.

Common RSI signals

AspectWhat it showsTypical caution
Above 70Strong recent gainsCan stay high in uptrends2
Below 30Strong recent lossesCan stay low in downtrends2
Crossing 50Momentum shifting to the up or down sideFrequent crosses in ranges
Bearish divergenceHigher price high, lower RSI highCan persist through several highs
Bullish divergenceLower price low, higher RSI lowNeeds price confirmation

How traders use the RSI

  • Timing pullbacks in trends

    In an uptrend, an RSI dip towards 40–50 can mark a pullback within the trend rather than a reversal.2

  • Spotting fading momentum

    Divergences warn that a move is losing strength. See Divergence.

  • Range trading

    In sideways markets, buying near 30 and selling near 70 works better than in trends. See Range Trading.

  • Filtering entries

    Some traders avoid buying breakouts when the RSI is already extreme, to avoid chasing.

Advantages and disadvantages

Advantages

  • Bounded 0–100 scale makes readings easy to compare.
  • Shows momentum that is not obvious from price alone.
  • Divergences can warn early that a move is weakening.

Disadvantages

  • Overbought and oversold readings can last a long time in trends.
  • Divergences can repeat several times before price turns — or never.
  • Signals depend on the period and the levels chosen.
  • It uses only closing prices, ignoring intraday ranges and volume.

Going deeper

Read as far as you need. Each level builds on the one before it.

RSI is not the same as “relative strength”

Beginner

Despite the name, the RSI compares a stock with its own past moves. “Relative strength” in the other sense — a stock’s performance against an index or another stock — is a different calculation.

Failure swings and range shifts

Intermediate

A top failure swing happens when the RSI makes a lower high and then falls below its previous low; a bottom failure swing is the mirror image.2 Unlike divergences, these signals are read on the RSI alone.

A range shift — the RSI moving from the 40–90 band to the 10–60 band, or the reverse — is one way to see a trend change in the indicator.2

Hidden divergence and settings

Advanced

Hidden divergence is used as a continuation signal: in an uptrend, price makes a higher low while the RSI makes a lower low. It is a community concept with no single agreed definition.

Platforms differ in the averaging they use: Wilder’s smoothing is standard, but some use simple or exponential averages, which give slightly different values. The RSI also often forms its own chart patterns and support or resistance levels.2

Common mistakes

  1. Shorting every reading above 70

    In uptrends this means fighting the trend. Check the Trend first.

  2. Acting on divergence alone

    Wait for price to confirm, for example by breaking a swing low.

  3. Changing settings until it fits

    Adjusting the period or the levels to match past charts creates false confidence.

  4. Ignoring the timeframe

    A 5-minute RSI and a daily RSI can say opposite things at the same moment.

Check your understanding

Test yourself before moving on. Each answer comes with an explanation.

Q1Average gain is $0.60 and average loss is $0.60. What is the RSI?
Q2In a strong uptrend the RSI has been above 70 for two weeks. What is the most reasonable reading?

Key points to remember

  1. RSI = 100 − 100 ÷ (1 + average gain ÷ average loss), usually over 14 periods.
  2. Above 70 is traditionally overbought, below 30 oversold — descriptions, not predictions.
  3. In uptrends the RSI tends to hold 40–50; in downtrends it tends to fail at 50–60.
  4. Divergences and failure swings warn that momentum is fading.
  5. Always read the RSI in the context of the trend.

Frequently asked questions

What is the best RSI setting?

14 periods is the standard and the most widely used. Shorter settings give more signals and more noise; longer settings fewer and later signals.

Does RSI above 70 mean I should sell?

No. It means recent gains have been strong. In uptrends the RSI can stay above 70 for weeks. Combine it with price structure before acting.

What is RSI divergence?

When price makes a new high (or low) that the RSI does not match. It suggests the move is losing momentum and can precede a reversal, but often lasts longer than expected.

Further learning

  • Trend

    The context that decides what an RSI reading means.

  • MACD

    Another momentum indicator, built from moving averages.

  • Moving Average

    A trend filter often paired with the RSI.

  • Support and Resistance

    Price levels that confirm or reject RSI signals.

Sources

This article is written in our own words. The sources below support the specific facts, rules and figures marked with a number in the text. Links open the original publisher’s page.

  1. StockCharts ChartSchool. Relative Strength Index (RSI) (opens in a new tab) Checked .
  2. Fidelity. Relative Strength Index (RSI) (opens in a new tab) Checked .

Read more elsewhere

Educational content, not financial advice. Examples use hypothetical prices and simplified costs; actual fees, margin rules and regulations vary by broker, market and country. Trading Metrics is our sister site, under the same ownership; we are not affiliated with any other publisher linked above. Last reviewed . Report an error or request a source credit.