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RSI (Relative Strength Index)

The Relative Strength Index (RSI) is a momentum oscillator, scaled 0 to 100, that measures how fast and how far a price has moved recently.

In one line: The Relative Strength Index (RSI) is a momentum oscillator, scaled 0 to 100, that measures how fast and how far a price has moved recently.

What it is

The RSI is a bounded oscillator (0–100) developed by J. Welles Wilder. It compares the size of recent gains to recent losses over a lookback (commonly 14 periods) to gauge momentum. Readings above 70 are conventionally called 'overbought'; below 30, 'oversold.'

Not the same as relative strength. RSI compares a stock to its own recent history. Relative strength compares a stock to the market. Confusing the two is the single most common indicator mistake.

How it works

RSI is most useful as a momentum gauge, not a mechanical buy/sell switch:

  • Overbought/oversold: extreme readings flag a stretched move that may pause — but in a strong trend RSI can stay overbought for weeks.
  • Divergence: if price makes a new high but RSI makes a lower high, momentum is fading — an early warning.
  • Midline (50): RSI holding above 50 confirms bullish momentum; below 50, bearish.

Worked example

Example

A large-cap rallies hard and its 14-day RSI hits 78 — overbought. A naive trader shorts it; the stock keeps climbing for two weeks because the trend is powerful. A more disciplined read waits for divergence: price makes a higher high but RSI prints a lower high (say 72 vs. 78). That loss of momentum, combined with a break of support, is a far more reliable warning than the overbought reading alone.

Why it matters

RSI is a fast, intuitive read on whether a move is running out of fuel — a useful complement to trend tools like moving averages. Its danger is being used in isolation: 'overbought' is not 'sell.' Strong trends stay overbought, and fighting them is how accounts bleed.

Entry Point Trading treats momentum as one input among several, never a lone trigger — then grades the resulting call in the open.

Keep learning

Related concepts

Relative Strength
Ranking what's leading vs. lagging the market.
Moving Averages
Smoothing price to see the trend beneath the noise.
MACD
A trend-and-momentum indicator built from moving averages.
Bollinger Bands
Volatility bands that flag stretched and quiet markets.
Momentum Investing
Buying strength, on the tendency of trends to persist.
Support and Resistance
Price levels where buyers and sellers repeatedly step in.
Stock Signal
A structured buy/sell/hold call — and what a good one must include.
Breakout Trading
Trading a move through a defined level on rising participation.

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Common questions

FAQ

Does overbought mean I should sell?
No — this is the classic RSI trap. Overbought means momentum is strong, and in a powerful uptrend RSI can stay above 70 for a long time. Selling purely because RSI is high often means selling your best trend too early. Use it with trend and price structure, not alone.
What RSI setting should I use?
The default 14-period is the standard and a fine starting point. Shorter settings (e.g., 7) are more sensitive and noisier; longer settings are smoother. Consistency matters more than the exact number — pick one so you can evaluate it over time.

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