RSI Indicator.

What is RSI?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements. It oscillates between 0 and 100, providing traders with a numerical representation of recent price strength.

RSI was developed by J. Welles Wilder Jr. and introduced in his 1978 book “New Concepts in Technical Trading Systems”. Despite being over 45 years old, it remains one of the most widely used technical indicators globally.

The core idea is simple: when prices rise rapidly without significant pullbacks, RSI moves toward 100 (overbought). When prices fall rapidly without bounces, RSI moves toward 0 (oversold). Extreme readings suggest the move may be due for a correction.

The RSI formula

RSI calculation has two steps. First, calculate the Relative Strength (RS) — the ratio of average gains to average losses over the lookback period:

Then convert RS to an oscillator bounded between 0-100:

The first calculation uses simple averages over the period (default 14). Subsequent calculations use a smoothing formula similar to Wilder’s exponential moving average. Most charting platforms handle this calculation automatically – you don’t need to compute manually.

Default settings and variations

The default RSI period is 14 bars. This works on any timeframe – 14 minutes on M1 chart, 14 hours on H1, 14 days on daily. Wilder originally recommended 14 days but the indicator adapts to any timeframe.

Common period variations

Shorter periods produce more signals but more false signals. The default 14 is a balanced starting point; adjust based on your trading style and testing.

Overbought and oversold levels

Standard interpretation uses two key thresholds:

• Above 70 = Overbought: Recent buying may be excessive; potential correction or reversal
• Below 30 = Oversold: Recent selling may be excessive; potential bounce or reversal
• Between 30-70 = Neutral: No extreme momentum condition

Alternative levels for trending markets

In strong trending markets, some traders adjust thresholds:

• Strong uptrend: Overbought = 80, oversold = 40 (RSI rarely drops to 30)
• Strong downtrend: Overbought = 60, oversold = 20 (RSI rarely rises to 70)

RSI divergence – the most powerful signal

Divergence occurs when price and RSI move in opposite directions. It’s often considered RSI’s most powerful signal because it can precede major trend reversals.

Bullish divergence

Price makes lower lows, but RSI makes higher lows. The downtrend’s momentum is weakening – sellers are losing strength. Potential bottom forming.

Bearish divergence

Price makes higher highs, but RSI makes lower highs. The uptrend’s momentum is weakening – buyers are losing strength. Potential top forming.

Hidden divergence (trend continuation)

Less common but useful. Price makes higher low while RSI makes lower low (bullish hidden) suggests the uptrend will continue. Opposite for bearish hidden divergence.

For a complete strategy using this signal, see our RSI Divergence Strategy guide.

Common RSI mistakes

Mistake 1: Using RSI alone for entries

RSI tells you about momentum, not direction. Buying every oversold reading or selling every overbought reading produces terrible results in trending markets. Use RSI as confirmation, not standalone trigger.

Mistake 2: Ignoring the trend

RSI works differently in trending vs ranging markets. In strong uptrends, “oversold” RSI is a continuation signal, not reversal. Identify market regime first, then apply RSI appropriately.

Mistake 3: Over-optimizing settings

Tweaking RSI to 17.3 period or 32/68 levels based on backtesting recent data leads to curve-fitting. Stick with default 14 period and 30/70 levels unless you have strong systematic reasons otherwise.

Mistake 4: Treating divergence as immediate

Divergence shows momentum weakening, not immediate reversal. Markets can remain in divergence for extended periods before actually reversing. Wait for additional confirmation (price action break, support/resistance test) before entering.

RSI vs other momentum indicators

For deeper comparison: Stochastic guide and MACD guide.