RSI (Relative Strength Index)¶
OVERVIEW¶
RSI (Relative Strength Index) is a momentum oscillator developed by J. Welles Wilder Jr. in 1978 that measures the speed and magnitude of recent price changes. It produces a single value between 0 and 100 and is one of the most widely used technical indicators across equity, futures, and forex markets.
| Reading | Condition |
|---|---|
| Above 70 | Overbought |
| 50 | Neutral midpoint |
| Below 30 | Oversold |
Note
The 70/30 thresholds are conventional defaults, not universal laws. Traders commonly shift to 80/20 for highly volatile assets to reduce false signals.
FORMULA AND CALCULATION¶
RSI uses a two-step calculation over a default 14-period lookback window.
Step 1 — Initial values
Average Gain = Sum of gains over 14 periods / 14
Average Loss = Sum of losses over 14 periods / 14
RS = Average Gain / Average Loss
RSI = 100 − [100 / (1 + RS)]
Step 2 — Smoothed subsequent values (Wilder smoothing)
Average Gain = [(Prior Avg Gain × 13) + Current Gain] / 14
Average Loss = [(Prior Avg Loss × 13) + Current Loss] / 14
Note
Wilder smoothing prevents abrupt jumps and stabilises RSI output once the lookback window is fully seeded.
Worked example — AAPL over 14 trading days
Assume 9 up-days with an average gain of $1.40 and 5 down-days with an average loss of $0.70.
| Variable | Calculation | Result |
|---|---|---|
| Average Gain | (9 × $1.40) / 14 | $0.90 |
| Average Loss | (5 × $0.70) / 14 | $0.25 |
| RS | $0.90 / $0.25 | 3.60 |
| RSI | 100 − [100 / (1 + 3.60)] | 78.26 |
An RSI of 78.26 places AAPL firmly in overbought territory.
HOW TO USE¶
Swing trading re-entries
A pullback to RSI 40–50 during an established uptrend is a higher-probability re-entry point than chasing strength at RSI 75. Traders wait for RSI to compress back into this band before adding to long positions.
Day trading with shorter lookbacks
Reduce the lookback period to RSI-7 or RSI-9 on 5-minute charts to generate faster intraday signals. Shorter periods increase sensitivity but also increase noise.
Divergence setups
| Divergence Type | Price Action | RSI Action | Signal |
|---|---|---|---|
| Bearish | New high | Lower high | Weakening momentum; watch for reversal |
| Bullish | New low | Higher low | Strengthening momentum; watch for reversal |
Tip
Divergence setups are among the most reliable RSI applications. Confirm with volume or a secondary indicator such as MACD before entering.
Exit signals
When RSI is in overbought territory, monitor for bearish divergence or a pullback back through the 50-line as a potential exit trigger.
LIMITATIONS¶
Note
RSI describes momentum, not trend direction. It should not be used as a standalone entry or exit signal.
| Limitation | Detail |
|---|---|
| Trending markets | RSI can remain above 70 for extended periods in a strong uptrend. Shorting on every overbought reading during a sustained rally produces repeated losses. |
| Fixed thresholds | 70/30 defaults are not appropriate for all instruments. Adjust to 80/20 for high-volatility assets. |
| Illiquid instruments | Repeated price gaps distort Wilder-smoothed averages and render RSI unreliable on thinly traded markets. |
| No directional bias | RSI measures the speed of moves, not whether the trend will continue or reverse. |