What is Relative Strength Index (RSI)?
Definition
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Readings above 70 typically indicate overbought conditions, while readings below 30 suggest oversold conditions.
Detailed Explanation
Developed by J. Welles Wilder in 1978, RSI is calculated using 14 periods by default. The formula compares the average gain during up periods to the average loss during down periods. RSI = 100 - (100 / (1 + RS)), where RS = Average Gain / Average Loss over the lookback period.
RSI is one of the most widely used technical indicators because of its versatility. Besides overbought/oversold signals, traders watch for RSI divergences — when price makes a new high but RSI makes a lower high, it suggests weakening momentum and a potential reversal. Bullish divergence (price makes new low, RSI makes higher low) suggests the downtrend may be losing steam.
In strong trends, RSI can remain overbought or oversold for extended periods. During a powerful uptrend, RSI may stay above 40-50 and repeatedly touch 70-80 without a significant price pullback. Experienced traders adjust their interpretation based on the trend direction — in an uptrend, RSI dips to 40-50 are buying opportunities rather than sell signals.
RSI can be applied to any timeframe. Day traders often use 5-minute or 15-minute RSI, while swing traders prefer daily RSI. Weekly RSI is useful for identifying intermediate-term trend shifts. Multiple timeframe analysis — checking RSI across daily, weekly, and monthly charts — provides more reliable signals.
Formula
RSI = 100 - (100 / (1 + RS)), where RS = Average Gain / Average Loss over 14 periodsExample
If a stock has averaged 1.5% gains on up days and 0.8% losses on down days over 14 periods, RS = 1.5/0.8 = 1.875, and RSI = 100 - (100/2.875) = 65.2, suggesting neutral-to-bullish momentum.
Frequently Asked Questions
Is RSI above 70 always a sell signal?
What RSI settings should I use?
Related Terms
Moving Average
A moving average is a technical indicator that smooths price data by calculating the average price over a specific number of periods. It helps identify trends, support and resistance levels, and potential buy or sell signals by filtering out short-term price noise.
Volume
Volume is the total number of shares or contracts traded in a security during a given period, typically a single trading day. It measures the intensity of trading activity and is a key indicator of market interest, liquidity, and the strength of price movements.
MACD (Moving Average Convergence Divergence)
MACD is a trend-following momentum indicator that shows the relationship between two exponential moving averages of price. It generates signals through crossovers of the MACD line and signal line, zero-line crossovers, and divergences with price.
Bollinger Bands
Bollinger Bands are a technical analysis tool consisting of a middle band (20-period SMA) and two outer bands set at two standard deviations above and below the middle band. They dynamically adjust to volatility, widening during volatile periods and narrowing during calm periods.
See It in Action
Disclaimer: The information on this page is provided for educational and informational purposes only and does not constitute investment advice. AI-generated analysis may contain errors or inaccuracies. Always conduct your own research and consult a qualified financial advisor before making investment decisions.
See Relative Strength Index (RSI) in Action
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