RSI Indicator Explained
The Relative Strength Index (RSI) is one of the most popular momentum indicators. It measures how strong recent price moves have been on a scale from 0 to 100.
What is RSI?
RSI was developed by J. Welles Wilder. It compares the size of recent gains with recent losses to show whether buying or selling momentum is stronger. It is drawn as a line below the price chart, moving between 0 and 100.
How RSI is calculated
RSI = 100 − 100 ÷ (1 + RS), where RS is the average gain divided by the average loss over the chosen period. The standard period is 14.
You don't need to calculate it by hand; every charting platform does it automatically.
Reading RSI levels
| RSI level | Common reading |
|---|---|
| Above 70 | Overbought: price has risen fast and may pause or pull back |
| 50 | Midline: above 50 favours buyers, below 50 favours sellers |
| Below 30 | Oversold: price has fallen fast and may bounce |
RSI divergence
- Bullish divergence: price makes a lower low but RSI makes a higher low, a sign selling momentum is fading.
- Bearish divergence: price makes a higher high but RSI makes a lower high, a sign buying momentum is fading.
- Divergence is a warning, not a signal on its own. Wait for price to confirm.
RSI trading strategies
| Strategy | How it works |
|---|---|
| Oversold bounce in an uptrend | In an uptrend, buy when RSI dips toward 30–40 and turns back up |
| Midline cross | RSI crossing above 50 confirms bullish momentum; below 50, bearish |
| Divergence reversal | Trade a confirmed reversal after divergence at a key support or resistance |
| Failure swing | RSI fails to make a new extreme and breaks its own prior swing |
RSI settings
- 14 periods is the standard setting
- Shorter periods (such as 7–9) make RSI more sensitive
- Longer periods (such as 21) make it smoother
- Some traders use 80/20 instead of 70/30 in strong trends
Common RSI mistakes
- Selling just because RSI is above 70: in strong uptrends it can stay overbought for weeks
- Ignoring the overall trend
- Using RSI alone without support, resistance or volume
Frequently asked questions
What does RSI mean in the stock market?
RSI stands for Relative Strength Index, a momentum indicator that measures the speed and size of recent price changes on a scale of 0 to 100.
What is a good RSI to buy?
Traders often look for RSI near 30 or below (oversold) in a market that is otherwise in an uptrend, combined with support on the chart. RSI alone is not enough to buy.
What is the best RSI setting?
The standard setting is 14 periods. Shorter settings react faster but give more false signals; longer settings are smoother but slower.
Is RSI good for intraday trading?
Yes, many intraday traders use RSI on short timeframes, but signals are noisier, so it works best combined with price levels and volume.
Educational information only, not investment advice. Market data may be delayed.
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