Relative Strength Index (RSI)

What is RSI?

The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder in 1978. It measures the magnitude of recent price changes to evaluate overbought or oversold conditions, oscillating between 0 and 100.

How It Works

RSI compares the average gains to average losses over a lookback period (typically 14 bars). When buyers dominate, RSI rises toward 100. When sellers dominate, RSI falls toward 0.

A reading above 70 suggests the asset may be overbought. A reading below 30 suggests it may be oversold.

Formula

RS  = Average Gain over N periods / Average Loss over N periods
RSI = 100 – (100 / (1 + RS))

Where the default N = 14.

Parameters

Signal Interpretation

• RSI > 70 → Overbought: potential selling opportunity or pullback ahead
• RSI < 30 → Oversold: potential buying opportunity or bounce ahead
• RSI crosses 50 upward → Bullish momentum shift
• RSI crosses 50 downward → Bearish momentum shift
• Divergence → Price makes new high but RSI does not = bearish divergence (and vice versa)

Trading Strategies

• Classic: Buy when RSI dips below 30 and crosses back above; sell when RSI exceeds 70 and crosses back below
• Trend filter: In an uptrend, only take buy signals (RSI < 40 bounce); in a downtrend, only sell signals (RSI > 60 rejection)
• Divergence play: Most powerful signal — when price and RSI move in opposite directions

Tips & Best Practices

• RSI works best in ranging/sideways markets. In strong trends it can stay overbought/oversold for extended periods.
• Combine with support/resistance levels for high-probability setups.
• On daily charts, 14-period RSI is standard. On intraday (5m, 15m), consider 9-period for more sensitivity.
• Wilder's original smoothing uses a modified EMA (Wilder smoothing), not a simple average.