The relative strength index (RSI)

In simple terms

The relative strength index (RSI) measures how strong recent gains have been compared with recent losses. It produces a number between 0 and 100:

• Near 100: almost all recent moves were up.
• Around 50: gains and losses were balanced.
• Near 0: almost all recent moves were down.

RSI is a momentum oscillator: it describes the speed and direction of recent price changes, swinging between fixed limits. (It has nothing to do with comparing a share with an index, which is sometimes also called relative strength.)

Calculating RSI

The averages are taken over all N periods: up days contribute their gain and zero loss; down days contribute their loss and zero gain.

After the first value, most charting tools smooth the averages so that each new day adds a fraction of its gain or loss to the previous average, a method introduced by J. Welles Wilder, who created RSI. This makes RSI change gradually rather than jumping as old days drop out.

Overbought and oversold

Readings above 70 are conventionally called overbought and below 30 oversold. The words suggest the price has gone "too far" and must reverse. That is not what RSI measures.

• An RSI of 80 means gains have far outweighed losses recently. It describes strength, not an obligation to fall.
• In a strong uptrend, RSI can stay above 70 for weeks while the price keeps rising. Selling every time RSI passes 70 means repeatedly selling into strength.
• In a strong downtrend, RSI can stay below 30 for long periods. Buying every oversold reading means repeatedly buying into weakness.

Some traders use RSI differently in trends and ranges: in a range, extremes may mark turning points more often; in a trend, they may confirm strength. Identifying which you are in is the hard part, as the market structure lesson explains.

Divergences

A divergence occurs when the price makes a new high but RSI makes a lower high (or the price makes a new low but RSI a higher low). It shows that momentum is slowing: the latest rise was smaller than the previous one.

Slowing momentum often precedes a turn, but it also often precedes nothing at all: trends can continue for a long time with repeated divergences. On its own, a divergence is a weak signal, and its success rate needs testing like any other, as the false signals lesson explains.

Why it matters

RSI is one of the most popular indicators in trading apps and tip groups, usually with the message "RSI above 70, sell". Understanding the calculation shows that RSI measures recent strength, not what happens next, and explains why mechanical overbought and oversold rules often fail in trending markets.

Limitations

RSI depends on the period chosen; shorter periods swing more and give more extreme readings. It is built only from past closing prices and lags turning points. The 70 and 30 levels are conventions, not discoveries.

Common mistakes

• Treating overbought as "about to fall".
• Fighting strong trends with RSI extremes.
• Trading every divergence.
• Changing the period until RSI fits past turning points.

Try it yourself

1. Take 15 consecutive closing prices for any share and calculate the 14 daily changes.
2. Add up the gains and losses, find the averages over 14 days, and calculate RSI.
3. Compare your result with the RSI on a charting tool, which may differ slightly because of smoothing.
4. Find a period when RSI stayed above 70 and note what the price did.