RSI
RSI measures how fast and how far price has moved recently on a 0–100 scale. Here's how to read overbought and oversold levels, divergence, and why RSI alone is not a signal.
Full name
Relative Strength Index
Default settings
14 periods; levels at 70 and 30
Formula
RSI = 100 − 100 / (1 + RS), where RS = average gain / average loss over N periods (Wilder smoothing)
What RSI measures
The Relative Strength Index, developed by J. Welles Wilder in 1978, compares the size of recent up-moves with recent down-moves and plots the result between 0 and 100. A reading near 100 means almost all recent movement has been up. A reading near 0 means almost all of it has been down.
RSI is a momentum oscillator. It tells you about the speed of a move, not its direction in the long run, and not whether a market is "cheap" or "expensive".
How it's calculated
For each bar, the indicator records the gain (if price closed higher) or loss (if it closed lower). It then smooths the average gain and average loss over the lookback period, usually 14 bars, using Wilder's smoothing method. The ratio of average gain to average loss is the relative strength (RS), and RSI = 100 − 100 / (1 + RS).
How to read it
Overbought and oversold
The classic levels are 70 and 30. Above 70 is called overbought and below 30 oversold. In ranging markets, moves back inside those levels can mark turning points. In strong trends RSI can stay above 70 or below 30 for a long time, so selling just because RSI is high is one of the most common beginner losses.
The 50 line
Many traders use 50 as a trend filter. In an uptrend RSI tends to hold between roughly 40 and 80; in a downtrend between 20 and 60. Only taking long setups while RSI stays above 40–50 keeps you trading with momentum rather than against it.
Divergence
Bearish divergence is when price makes a higher high but RSI makes a lower high, a sign that the push is losing strength. Bullish divergence is the opposite. Divergence can persist through several swings, so treat it as a warning, then wait for price to confirm with a break of structure.
Common mistakes
- Fading strong trends because RSI is "overbought".
- Using RSI on its own with no level, trend or stop-loss plan.
- Changing the period after every loss. Pick settings, test them, and keep them stable.
Putting it to work
RSI works best as a filter inside a complete plan: define the trend, mark key support and resistance, then use RSI to time entries or spot fading momentum. Before you trade any signal, size the position with the position size calculator so a stop-out costs only what you planned.
Indicators describe what price has already done. They don't predict. Treat every reading as context, not a command.
Indicators work best inside a plan
See which strategies use this indicator, then size the trade before you enter.