What is RSI?
In short
A 0–100 momentum oscillator (usually 14 periods). Above 70 is considered overbought, below 30 oversold.
Also known as: relative strength index
The RSI (Relative Strength Index) is a momentum indicator that measures the speed and strength of price moves on a 0 to 100 scale. It was developed by J. Welles Wilder; the standard period is 14.
Formula
- RS = Average gain ÷ Average loss (over the last 14 periods).
- RSI = 100 − 100 ÷ (1 + RS).
If up days have been stronger than down days, RSI is above 50; if the reverse, below it.
Traditional reading
- Above 70 — "overbought".
- Below 30 — "oversold".
- Around 50 — balance; many traders use 50 as a trend filter.
An important nuance
An RSI above 70 does not automatically mean "sell". In a strong uptrend RSI can stay above 70 for weeks — that is a sign of strength, not weakness. Likewise, in a downtrend RSI can stay below 30 for a long time. So RSI should first be read in the context of the trend.
Other uses
- Divergence: price makes a new high but RSI does not — momentum is fading.
- In a trend, RSI dipping to 40–50 on a pullback and turning up can be a sign the trend is continuing.
RSI is a supporting tool, not a stand-alone trading system.
During the rally RSI went above 70 and reached ~85 — the move was strong. That is not "sell now": in a strong trend RSI can stay high for a long time. RSI needs 14 candles before it starts.
RSI works better in a sideways market: ~75 at resistance, 27 at support. But on the second touch RSI only fell to 35 — the "below 30" rule gave no signal, yet the level held anyway. Level first, indicator second. RSI needs 14 candles before it starts.
Example
Illustrative case, a 14-day RSI:
- Over the last 14 days the average gain is $1.20 and the average loss $0.60.
- RS = 1.20 ÷ 0.60 = 2.
- RSI = 100 − 100 ÷ (1 + 2) = 100 − 33.3 = 66.7.
Over the next few days the stock rallies hard: the average gain moves to $1.50 and the average loss to $0.50.
- RS = 1.50 ÷ 0.50 = 3.
- RSI = 100 − 100 ÷ 4 = 75 — above 70.
If the stock is in a steady daily uptrend at this point (HH/HL), an RSI of 75 is not a reason to sell on its own. But if price later makes a new high while RSI only reaches, say, 68 instead of the previous 75, that is a bearish divergence worth paying attention to.
Mistakes and tips
Shorting a strongly rising stock because RSI is above 70 is one of the most common beginner mistakes.
Use RSI together with the trend: in an uptrend the 30–40 zone, and in a downtrend the 60–70 zone, often matter more.
Shortening the period (to 7, for example) makes RSI hit the extremes more often — more signals, but lower quality.
Frequently asked questions
- Should I sell when RSI goes above 70?
- Not necessarily. In a strong trend RSI can stay above 70 for a long time, which is often a sign of strength. A sell decision should rest on the trend, levels and your stop plan.
- Is a stock cheap when RSI is below 30?
- RSI only shows that price fell fast over a short period; it says nothing about the company's value. In a downtrend RSI can stay low while price keeps falling.
- What is the best RSI setting?
- The standard 14-period setting is the most common, and it is what most traders watch. Other settings are used too, but there is no universally best one.
Learn it in the Academy
This term is covered with hands-on examples and a quiz in these lessons of the interactive course.
- Volume and core indicatorsVolume and relative volume, RSI in trends and ranges, MACD, VWAP and moving averages — when each one helps and when it misleads.Open lesson · 11 min
- Divergence: when price and momentum disagreeRegular and hidden divergence, RSI and MACD, drawing it correctly swing to swing, waiting for confirmation, and the cases where divergence fails.Open lesson · 12 min
- Limitup tools: one process from idea to journalHalal check, screener, watchlist, chart, alerts, calendar, calculators and journal — when and how to use each.Open lesson · 11 min
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