What is the RSI in trading?
The RSI (Relative Strength Index) is an oscillator created by J. Welles Wilder that compares the size of recent price gains and losses on a scale of 0 to 100. With its standard 14-period setting, a reading above 70 is considered overbought and one below 30, oversold.
How the RSI is calculated
The RSI takes the last 14 periods of whatever timeframe you’re looking at (14 days on a daily chart, 14 hours on an hourly chart) and separates the closes that went up from the ones that went down. Then it compares the average gain with the average loss:
RSI = 100 − 100 / (1 + RS), where RS is the average gain divided by the average loss.
Example: if over the last 14 days the average gain was $1.20 and the average loss was $0.40, RS equals 3 and the RSI is 100 − 100 / 4 = 75. You don’t need to do the math by hand: any charting platform calculates it for you. What you do need is to understand what it reflects.
- Near 100: over the recent periods, gains were more frequent and larger than losses.
- Near 0: losses dominated.
- Around 50: gains and losses balanced out.
What 70 and 30 mean
Above 70, traders call it overbought; below 30, oversold. The names are misleading: they don’t mean the price is expensive or cheap, or that it has to turn around. They only tell you the recent move was strong in one direction.
In a solid uptrend, the RSI can spend weeks above 70 while price keeps climbing. In a downtrend, it can stay below 30 while price keeps falling.
How traders use it
- To gauge the strength of a trend. In strong uptrends, the RSI tends to move in the upper half of the scale, and pullbacks tend to stall before reaching 30. The opposite happens in downtrends.
- To spot divergences. If price makes a new high and the RSI makes a lower high than the previous one, momentum is weakening. It’s a signal for caution, not a sell order.
- Together with price. An RSI reading carries more weight when it lines up with something you see on the chart, such as support or resistance.
The RSI on different timeframes
The RSI on a daily chart and the RSI on a 15-minute chart can say different things at the same time: one can show overbought while the other sits at 45. That’s why it’s best to read it on the timeframe where you make your decisions, and to check the higher timeframe to know which trend you’re trading with or against. When both agree, the reading carries more weight.
The most common mistake
Trading against the trend just because the RSI crossed 70 or 30. That’s the fastest way to rack up losses with this indicator: price can stay overbought far longer than your account can hold out.
It also helps to know that the period changes how it behaves. With fewer than 14 periods, the RSI becomes more sensitive and generates more signals, many of them false. With more periods it smooths out, but it reacts late. No setting works the same in every market, so test it before you rely on it.
Jesse · the MasterAn RSI above 70 in the middle of an uptrend tells me buyers are in charge, not that the rally is over. Before I think the opposite, I wait for price to confirm it.
Learn it in depth in lesson 2.5: Momentum: RSI and MACD
In the course you practice it with real charts, pop quizzes and an exam that tells you whether you really got it. Start free with lesson 1.1; no card required.
Frequently asked questions
What is the best RSI setting?
The standard is 14 periods with levels at 70 and 30, as Wilder proposed. Shorter periods make the indicator more sensitive and generate more false signals; longer periods smooth it out, but it reacts late. No single setting works best in every market.
Does an RSI above 70 mean the price will drop?
No. It means recent gains were strong. In uptrends, the RSI can stay above 70 for weeks while price keeps rising. It’s a read on strength, not a sell signal.
What is an RSI divergence?
It’s when price makes a new high (or low) and the RSI doesn’t follow. It suggests momentum is weakening. It’s a signal for caution that needs confirmation from price, not a sure sign of a reversal.
Related terms
Educational content from The Trading Path. Not a recommendation to buy or sell any asset.