Relative Strength Index
Measures the speed and magnitude of price changes on a 0–100 scale, identifying overbought and oversold conditions and momentum divergence.
Description
The Relative Strength Index was developed by J. Welles Wilder and introduced in his 1978 book New Concepts in Technical Trading Systems. It measures the ratio of recent gains to recent losses, scaled to a 0–100 range. RSI is one of the most widely used indicators in technical analysis and appears in virtually every charting platform.
How It Works
RSI compares average gains to average losses over a lookback period (default: 14). First, each period is classified as a gain or loss based on the close. Average Gain and Average Loss are computed using Wilder’s smoothing method. RS = Average Gain / Average Loss. RSI = 100 − 100/(1 + RS). The result oscillates between 0 (maximum weakness) and 100 (maximum strength).
How to Read It
Traditional thresholds: RSI above 70 is considered overbought; below 30 is oversold. The 50 centerline indicates momentum direction — above 50 is bullish, below is bearish. The most reliable signal is divergence: price makes a new high but RSI makes a lower high (bearish divergence), or price makes a new low but RSI makes a higher low (bullish divergence). These divergences often precede reversals.
Common Uses
- Identifying overbought/oversold conditions
- Divergence detection as an early reversal warning
- Centerline crossovers as trend confirmation
- Failure swings (RSI exceeds 70, pulls back, fails to reach 70 again — bearish)
Caveats
In strong trends, RSI can remain overbought or oversold for extended periods — trading against a 70+ RSI in a strong uptrend is a reliable way to lose money. The 14-period default was calibrated for daily charts; shorter periods produce more extreme and noisier readings. Divergence is a warning, not a trigger — it can persist for many bars before price reacts.