RSI Indicator Explained: How to Read and Use the Relative Strength Index

The Relative Strength Index (RSI) is a momentum indicator that measures how strongly price has been rising versus falling over a set number of periods, usually 14, and expresses the answer on a scale from 0 to 100. Readings above 70 are traditionally called overbought and readings below 30 oversold.

That is the RSI indicator explained in two sentences, but the classic 70/30 rule is also where most beginners go wrong. In a strong uptrend, RSI can sit above 70 for weeks while price keeps climbing. Used well, RSI tells you about the speed and health of a move, which is useful for timing entries within a trend, spotting fading momentum and avoiding chasing.

This guide covers where RSI came from, the formula with a small worked 14-period calculation, overbought and oversold levels, divergences, failure swings, how RSI behaves in trending versus ranging markets, settings, and how it compares with the stochastic oscillator and MACD.

What Is the RSI Indicator?

RSI was developed by J. Welles Wilder Jr. and published in his 1978 book New Concepts in Technical Trading Systems, the same book that introduced the Average True Range (ATR), the Average Directional Index (ADX) and the Parabolic SAR.

RSI is an oscillator, meaning it moves back and forth within a fixed range rather than following price on the chart. It is plotted in a separate panel beneath the price, with horizontal lines usually drawn at 70 and 30, and often at 50.

Despite the name, RSI has nothing to do with “relative strength” in the sense of comparing one stock with another or with an index. It compares a market’s own recent gains with its own recent losses. A reading of 50 means average gains and average losses over the period were equal. A reading of 80 means gains have heavily outweighed losses.

RSI is one of the core tools in technical analysis, and it works the same way on stocks, ETFs, currencies, commodities and crypto, on any timeframe from one-minute to monthly charts.

The RSI Formula

RSI is built in three steps.

1. Measure each period’s change. For each of the last 14 periods, subtract the previous close from the current close. Up moves count as gains; down moves count as losses, recorded as positive numbers. A period that closes up has a loss of zero, and vice versa.
2. Average the gains and the losses. For the first calculation, add up the 14 gains and divide by 14, then do the same for the losses.
3. Convert to a 0–100 scale. Divide average gain by average loss to get the relative strength (RS), then apply:

RSI = 100 − [100 ÷ (1 + RS)], where RS = Average gain ÷ Average loss

After the first value, Wilder used a smoothing method rather than a plain 14-period average. Each new average keeps 13/14 of the previous one and adds 1/14 of the latest period:

New average gain = [(Previous average gain × 13) + Current gain] ÷ 14

The same formula applies to average loss. This is a form of exponential moving average, so older data never drops out completely. That is why RSI values on the same chart can differ slightly between platforms that start their calculation from different dates.

Worked example: a 14-period RSI calculation

RSI Overbought and Oversold Levels

Wilder treated RSI above 70 as overbought and below 30 as oversold. Overbought means price has risen quickly and far relative to recent losses; oversold means the opposite.

The key point is that overbought does not mean “about to fall,” and oversold does not mean “about to rise.” Those levels describe momentum that is stretched, which can persist. Many of the strongest rallies in market history spent long periods above 70.

70/30 vs 80/20

Some traders widen the bands to 80 and 20. Wider levels produce fewer signals, and the ones that do appear reflect more extreme conditions. The trade-off is that you will miss many turns that never reach those extremes.

A more cautious way to use the levels is to wait for RSI to cross back: below 70 after being overbought, or above 30 after being oversold. That at least shows momentum has started to turn rather than simply being stretched.

RSI Divergence and Failure Swings

A divergence occurs when price and RSI disagree about the direction of momentum. Wilder considered divergences among the most significant RSI signals.

• Bearish divergence: price makes a higher high, but RSI makes a lower high. The latest push up happened with less momentum than the one before.
• Bullish divergence: price makes a lower low, but RSI makes a higher low. Sellers pushed price to a new low, but with less force.

Divergences are warnings, not triggers. In a strong trend, RSI can diverge several times while price keeps going. Treat a divergence as a reason to tighten a stop, take partial profits or wait for confirmation, such as a break of a trendline or a support or resistance level.

Positive and negative reversals

Analyst Andrew Cardwell described the mirror image of divergence, which he called reversals. A positive reversal is when RSI makes a lower low while price makes a higher low, which he read as a sign of strength within an uptrend. A negative reversal is when RSI makes a higher high while price makes a lower high, a sign of weakness within a downtrend. Some traders call these hidden divergences.

Failure swings

Wilder also described failure swings, which use only the RSI line and ignore price.

• Bullish failure swing: RSI falls below 30, bounces above 30, pulls back but stays above 30, then breaks above its previous bounce high. The break is the signal.
• Bearish failure swing: RSI rises above 70, drops back below 70, rallies but fails to get back above 70, then falls below its previous pullback low.

The idea is that momentum tried to reverse, then tried and failed to resume the old direction. Because the pattern requires RSI to confirm a change in momentum twice, failure swings are less common than simple overbought or oversold readings.

RSI in Trending vs Ranging Markets

RSI behaves very differently depending on the market’s condition, and using the wrong interpretation is the source of most frustration with it.

Ranging markets

When price moves sideways between support and resistance, the classic overbought and oversold readings work best. RSI near 70 as price tests the top of the range, and near 30 as it tests the bottom, can help time trades in both directions.

Trending markets

In trends, RSI tends to shift its range. Constance Brown, in Technical Analysis for the Trading Professional, observed that in bull markets RSI often moves between about 40 and 90, with the 40–50 zone acting as support. In bear markets, it often moves between about 10 and 60, with 50–60 acting as resistance.

That gives you a more useful way to read RSI in a trend:

• In an uptrend, look for pullbacks where RSI dips toward 40–50 and turns up, rather than waiting for 30, which may never come.
• In a downtrend, rallies that stall with RSI near 50–60 are often selling opportunities for short-term traders.
• RSI holding above 50 for weeks is itself a sign of an uptrend; holding below 50 suggests a downtrend.

To judge the trend first, many traders use a long moving average, such as the 200-day, and only take RSI signals in its direction.

RSI Settings: Which Period Should You Use?

Wilder’s default of 14 periods remains the most common setting, and it is what most charting platforms load automatically. Changing the period changes the character of the indicator.

• Shorter periods (2 to 9): more sensitive, reaching overbought and oversold more often. A 2-period RSI with very wide levels such as 90/10 is popular with some short-term mean-reversion traders.
• 14 periods: the standard balance between sensitivity and noise.
• Longer periods (20 to 30): smoother, rarely reaching extremes, so traders often tighten levels to 60/40.

The timeframe matters as much as the period. A 14-period RSI on a daily chart covers about three weeks of trading; on a weekly chart it covers 14 weeks. Signals on higher timeframes are fewer but usually more meaningful. Whatever you choose, keep it consistent and test it before risking money.

RSI Indicator: How to Use It Step by Step

1. Identify the market condition. Is price trending (higher highs and higher lows, or the reverse) or ranging? Check a long moving average and the price structure.
2. Choose the matching interpretation. In a range, use 70/30 extremes. In an uptrend, use pullbacks toward 40–50. In a downtrend, use rallies toward 50–60.
3. Look for confirmation. A candlestick reversal, a break of a short-term trendline or a bounce from support adds weight to an RSI signal.
4. Watch for divergences near key levels. A bearish divergence at major resistance deserves more attention than one in the middle of nowhere.
5. Define your exit before entering. Place a stop-loss where the idea is proven wrong, and size the position so that a loss is affordable.

Our guide to risk management in trading explains how to set those exits and limits.

RSI vs Stochastic Oscillator

The stochastic oscillator, developed by George Lane in the late 1950s, is RSI’s closest relative. Both are bounded momentum oscillators, but they measure different things.

RSI vs MACD

RSI is bounded between 0 and 100, so it can describe overbought and oversold conditions. The MACD indicator is the gap between two exponential moving averages and has no fixed upper or lower limit, so it is better at showing trend direction and changes in trend momentum than at identifying extremes. Many traders pair them: MACD for the trend, RSI for timing.

Limitations of RSI

• It is derived from price. RSI contains no information that is not already on the price chart; it simply presents it differently.
• It can stay extreme. Overbought and oversold readings can last a long time in trends.
• Divergences can fail repeatedly. A trend can produce several divergences before it ends, or none at all.
• Evidence of profitability is mixed. Academic reviews of technical trading rules, such as Park and Irwin (2007), found many studies reporting profits but flagged weaknesses in testing methods, including data snooping, and weaker results in more recent data.

Bottom Line

RSI compares average gains with average losses over 14 periods and plots the result between 0 and 100. Use 70/30 or 80/20 extremes in ranging markets, shift to 40–50 support and 50–60 resistance in trends, and treat divergences and failure swings as warnings that need confirmation. No RSI signal replaces a stop-loss and sensible position sizing. For more tools and strategies, explore our trading guides.

Sources

• StockCharts ChartSchool – Relative Strength Index (RSI)
• StockCharts ChartSchool – Stochastic Oscillator (Fast, Slow and Full)
• StockCharts ChartSchool – MACD (Moving Average Convergence/Divergence Oscillator)
• Journal of Economic Surveys (via RePEc) – Park and Irwin, What Do We Know About the Profitability of Technical Analysis?
• The Journal of Finance (via RePEc) – Brock, Lakonishok and LeBaron, Simple Technical Trading Rules and the Stochastic Properties of Stock Returns
• CFTC – Learn and Protect