What is the Relative Strength Index (RSI) Indicator?
The Relative Strength Index (RSI) is a momentum oscillator that measures how fast and how hard price has moved on a 0 to 100 scale. J. Welles Wilder built it in 1978, and it's been one of the most-used indicators ever since.
RSI plots in its own panel below the price chart. Three numbers matter:
- 70 — overbought. The move is stretched.
- 30 — oversold. The move is stretched the other way.
- 50 — the midpoint. Above 50, bulls are winning the bar-to-bar fight. Below 50, bears are.
How is the Relative Strength Index (RSI) Indicator Calculated?
The RSI compares average gains to average losses over a lookback period — 14 bars by default — and converts that ratio into a number between 0 and 100. The formula:
RSI = 100 − [100 / (1 + RS)], where RS = Average Gain / Average Loss
The calculation works like this:
- Pick a lookback period (14 is the default, and it works on any timeframe)
- For each bar, take the close-to-close change and split it into a gain or a loss
- Average the gains. Average the losses. Divide one by the other to get RS
- Plug RS into the formula above
After the first 14 bars, Wilder's smoothing updates the averages each bar — responsive enough to react, smooth enough to not be jumpy. You don't need to calculate this by hand. Every charting platform does it for you. But understanding what RSI measures changes how you use it.
How to Use the Relative Strength Index (RSI) Indicator in Trading?
Use the RSI as a momentum and exhaustion gauge. Extremes flag stretched moves. The 50 line tells you who's in control. Divergences warn you when momentum is fading. The cleanest signals come when RSI lines up with market structure — support/resistance, a swing high or low, a clear rejection.
On a live chart, this plays out five ways:
- Overbought/oversold crossback entries: RSI runs above 70 then drops back under as price stalls into resistance — that's bearish exhaustion. Or RSI dips below 30 then reclaims 30 as price rejects support — that's bullish exhaustion. The crossback matters more than the extreme itself.
- The 50-line trend filter: Stay long-biased when RSI holds above 50 on pullbacks. Stay short-biased when it caps below 50 on rallies. The 50 line shows who's winning the average bar-to-bar fight.
- Divergence as a reversal setup: Price prints a higher high but RSI prints a lower high — that's bearish divergence. Price prints a lower low but RSI prints a higher low — that's bullish divergence. Momentum fades even though price keeps extending.
- Stops and invalidation: Place your stop beyond the swing that created the RSI signal. Below the divergence low for longs. Above the divergence high for shorts. That way the trade only fails if structure fails.
- Confirmation: Wait for price to react at the level. A broken minor trendline. A reclaim or loss of a horizontal level. A strong rejection candle. The RSI reading warns you; price action triggers the entry.
⚠️ Warning: RSI can sit above 70 for weeks in a strong uptrend. It can sit under 30 for weeks in a downtrend. "Overbought" doesn't mean "short it." In trending markets, those extremes signal strength. New traders blow up here — they fade strong trends and get run over.
🔥 Pro Tip: RSI works best when you check it on the timeframe above the one you're trading. Trading the 5-minute? Check the 15- or 30-minute RSI for context. Trading the 1-hour? Check the 4-hour. The higher timeframe filters out the noise that makes lower-timeframe RSI signals fail.