RSI (Relative Strength Index)
How RSI Works
Developed by J. Welles Wilder in 1978, the RSI compares the average size of recent gains to the average size of recent losses over a set lookback period — typically 14 periods. The result is a single number that tells you how aggressively price has been moving in one direction.
When a stock rallies sharply, the RSI pushes toward 100. When it sells off hard, the RSI drops toward 0. Most of the time, it oscillates between these extremes, giving traders a real-time read on momentum.
RS = Average Gain over n periods ÷ Average Loss over n periods
The standard lookback is 14 periods. Shorter periods (like 9) make the RSI more sensitive and generate more signals. Longer periods (like 21) smooth it out and produce fewer, but more reliable, readings.
Key RSI Levels
| RSI Reading | Interpretation | Typical Action |
|---|---|---|
| Above 70 | Overbought — price has risen quickly and may be stretched | Watch for potential pullback; tighten stop-losses on longs |
| 50 | Neutral midline — often acts as a momentum dividing line | Above 50 = bullish bias; below 50 = bearish bias |
| Below 30 | Oversold — price has fallen quickly and may be due for a bounce | Watch for buying opportunity near support |
RSI Divergence
Divergence is one of the RSI’s most powerful signals. It occurs when price and the RSI move in opposite directions:
Bullish divergence: Price makes a lower low, but the RSI makes a higher low. This suggests selling momentum is weakening even though price is still falling — a potential reversal setup.
Bearish divergence: Price makes a higher high, but the RSI makes a lower high. Buying momentum is fading even as price pushes higher — the rally may be running out of steam.
Divergence works best when it appears near extreme levels (below 30 for bullish, above 70 for bearish) and is confirmed by price action — such as a bounce off a support level or a rejection at resistance.
Combining RSI with Other Indicators
RSI is most effective when used alongside other tools rather than in isolation. Common combinations include:
RSI + Moving Averages: An oversold RSI bounce that coincides with a stock touching its 50-day MA gives a higher-conviction entry signal than either indicator alone.
RSI + Volume: A bullish RSI divergence confirmed by rising volume on the bounce adds a layer of conviction.
RSI + Bollinger Bands: An oversold RSI reading while price touches the lower Bollinger Band flags a potential snapback.
For a complete strategy guide, see our RSI Deep Dive.
Key Takeaways
- RSI measures momentum on a 0–100 scale using a 14-period default lookback.
- Above 70 = overbought; below 30 = oversold — but these aren’t automatic buy/sell signals.
- RSI divergence (price vs. indicator moving in opposite directions) is one of the strongest reversal signals.
- Combine RSI with support/resistance, moving averages, or volume for higher-confidence signals.
- In strong trends, adjust the overbought/oversold thresholds to reduce whipsaws.
Frequently Asked Questions
What does an RSI of 50 mean?
An RSI of 50 means average gains and average losses over the lookback period are roughly equal — momentum is neutral. Many traders use the 50 line as a trend filter: above 50 favors long trades, below 50 favors shorts or staying on the sideline.
Is a 14-period RSI always best?
It’s the most common default, but not always optimal. Day traders often shorten it to 9 periods for more sensitivity. Longer-term traders may use 21 or 25 periods for smoother signals. The right setting depends on your time frame and how much noise you’re willing to tolerate.
Can RSI be used for any asset class?
Yes. RSI works on stocks, ETFs, futures, forex, and crypto. The concept — measuring the ratio of recent gains to losses — applies to any asset that has price data. The indicator is asset-agnostic.