Momentum · Indicator
RSI is a 0-100 momentum oscillator comparing the size of recent gains to recent losses, with 70 and 30 as the conventional extremes.
Overview
The Relative Strength Index is J. Welles Wilder's momentum oscillator, bounded between 0 and 100. It measures the ratio of average up-closes to average down-closes over N periods, so a reading of 70 means gains have substantially outweighed losses over the window and a reading of 30 means the opposite. The conventional overbought threshold is 70 and the oversold threshold is 30.
Despite the name, RSI has nothing to do with relative strength in the sense of comparing one instrument to another. The 'relative' refers to the internal comparison of a security's own gains against its own losses. That self-referential design is what bounds it: no matter how volatile the instrument, the output stays between 0 and 100, which makes readings comparable across markets and timeframes.
Wilder's original interpretation was about momentum losing force, not about price being expensive. A high reading says the recent sequence of closes has been dominated by advances, which is a description of strong momentum. The habit of treating 70 as a sell signal is a later simplification, and it works poorly in trends, where RSI can sit above 70 for weeks.
How it is calculated
Bar-to-bar changes in the source are split into gains and losses. Each is then smoothed using Wilder's method, a slow exponential average with a smoothing constant of 1/N rather than the more common 2/(N+1). The ratio of the two smoothed series is the relative strength, and the final formula compresses that ratio onto a 0-100 scale.
Because the averages are recursive, every past bar retains some influence forever, though its weight decays. The first value requires N bars, and a few multiples of N are needed before the smoothing has settled, which is why RSI values on a freshly loaded chart can differ slightly from those on a chart with deeper history.
Change = close - previous close Gain = Change if positive, else 0 Loss = -Change if negative, else 0 Average gain = Wilder-smoothed average of Gain over N periods Average loss = Wilder-smoothed average of Loss over N periods RS = Average gain / Average loss RSI = 100 - 100 / (1 + RS)
Inputs
How to read it
The 50 line is more useful than most beginners expect. RSI holding above 50 means average gains have exceeded average losses over the window, which is a compact description of an uptrend; holding below 50 describes a downtrend. Many traders use the 50 crossing as the trend read and the 70/30 lines only for context.
Read the extremes as conditions, not instructions. A market in a strong advance will generate RSI readings above 70 repeatedly, and each one is a sign of strength rather than an imminent reversal. The classic guidance for trends is to shift the bands: in an uptrend, treat 40 as the level that should hold on pullbacks; in a downtrend, treat 60 as the ceiling.
Divergence between RSI and price is the reading Wilder considered most valuable. Price making a higher high while RSI makes a lower high says the latest advance was achieved with less momentum than the previous one. That describes a weakening trend, but it does not time a turn, and divergences can persist through several further highs.
Signals to look for
Readings above 70 or below 30 mark the extremes of the recent gain-loss balance. Traders generally wait for the line to cross back through the threshold rather than acting on the first touch, and treat these levels as far less meaningful in a strong trend.
A higher price high with a lower RSI high, or a lower price low with a higher RSI low, indicates momentum failing to confirm the price extreme. It is a warning about trend quality, not a timing tool.
RSI crossing 50 is used as a simple trend filter, since it marks the point where average gains and average losses over the window are equal.
Wilder's own signal: RSI reaching an extreme, pulling back, then failing to exceed the prior extreme before breaking its intervening low or high. It is defined entirely on the oscillator, without reference to price.
Limitations
Frequently asked questions
RSI is a 0-100 momentum oscillator comparing the size of recent gains to recent losses, with 70 and 30 as the conventional extremes.
The 50 line is more useful than most beginners expect. RSI holding above 50 means average gains have exceeded average losses over the window, which is a compact description of an uptrend; holding below 50 describes a downtrend. Many traders use the 50 crossing as the trend read and the 70/30 lines only for context.
Overbought and oversold: Readings above 70 or below 30 mark the extremes of the recent gain-loss balance. Traders generally wait for the line to cross back through the threshold rather than acting on the first touch, and treat these levels as far less meaningful in a strong trend.
RSI stays overbought through strong uptrends and oversold through strong downtrends. Trading the thresholds mechanically means fighting the dominant direction for as long as it persists.
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