What is the Relative Strength Index?
RSI, or the Relative Strength Index, is a momentum oscillator that measures the speed and size of recent price changes and displays it on a scale from zero to one hundred. This indicator was introduced by Welles Wilder and today is one of the most widely used tools for spotting overbought and oversold zones in the market.
How it's calculated
RSI is calculated based on the ratio of average recent gains to average recent losses over a defined period (usually 14 candles). The larger recent gains are relative to losses, the closer the RSI reading moves toward one hundred; conversely, losses dominating pushes the reading toward zero.
How to read the chart
A reading above 70 is usually considered the overbought zone, meaning the price may have risen too much, too fast, and a correction or pause in the trend is possible. A reading below 30 is the oversold zone, meaning selling pressure may have been excessive and a price rebound is possible. The midline at 50 is also often used to judge whether buyers or sellers are in control.
Trading signals
One of RSI's strongest signals is divergence: when price makes a higher high but RSI makes a lower high (bearish divergence), or price makes a lower low but RSI makes a higher low (bullish divergence), this usually signals the current trend is weakening and a price reversal is possible. RSI exiting the 70 and 30 zones is also used on its own by some traders as an entry or exit signal.
Strengths and limitations
RSI is very useful in ranging, choppy markets, but during strong, powerful trends it can stay in the overbought or oversold zone for a long time without the price reversing; this is called “RSI riding the band,” and entering early based on it can be risky.
Practical tip
Instead of trading purely on RSI crossing 70 or 30, it's better to first identify the overall market trend on a higher timeframe and only take RSI signals that align with that trend, not against it.