Relative Strength Index (RSI)

The Relative Strength Index (RSI) is a momentum oscillator that measures how strongly a price has been rising compared with how strongly it has been falling. It moves between 0 and 100. J. Welles Wilder introduced it in 1978 in New Concepts in Technical Trading Systems, and it has become one of the most widely used indicators in technical analysis.

Despite its name, RSI does not compare one stock with another. It measures the internal strength of a single price series. To compare a stock with an index, use relative strength (comparative) instead.

How RSI is calculated

For each bar, record the gain (if the close is higher than the previous close) or the loss (if it is lower). Then average the gains and the losses over the period, usually 14 bars:

RS  = average gain / average loss       (over N bars, Wilder smoothing)
RSI = 100 - 100 / (1 + RS)

Wilder’s smoothing works like an exponential average: each new average is the previous average times (N−1)/N plus the new value times 1/N. When gains dominate, RS is large and RSI approaches 100. When losses dominate, RSI approaches 0. Equal gains and losses give 50.

How to read RSI

• Overbought and oversold. Readings above 70 are traditionally called overbought and readings below 30 oversold. They describe a stretched market, not a reversal: in a strong trend RSI can stay above 70 or below 30 for weeks.
• Trend ranges. In uptrends RSI tends to swing between about 40 and 80, and in downtrends between about 20 and 60. A pullback that holds above 40 to 50 is a sign the uptrend is intact.
• Centerline. RSI above 50 means average gains exceed average losses. Some traders use a cross of 50 as a simple trend filter.
• Divergence. Price makes a new low but RSI makes a higher low (bullish), or price makes a new high but RSI makes a lower high (bearish). Divergence warns that momentum is fading; it is not a timing signal on its own.
• Failure swings. Wilder’s own signal: RSI falls below 30, bounces, pulls back without breaking 30 again, then rises above its bounce high. The bearish version mirrors it above 70.

Settings and common mistakes

• Period. 14 is the standard. Shorter periods (2 to 5) make RSI swing to extremes often and are popular for short-term mean-reversion trading. Longer periods (21 to 30) give fewer, slower signals.
• Selling every reading above 70. In a strong uptrend that means selling the best stocks too early. Check the trend first, for example whether price is above its 200-day moving average.
• Using one level for every stock. Volatile stocks reach 70 and 30 far more often than quiet ones. Look at a stock’s own RSI history before choosing levels.

Live chart: SPY (S&P 500 ETF), daily, with RSI(14). The chart updates every trading day.

Screen for it on MarketInOut

RSI is built into our formula language as rsi(period). Oversold stocks that are still in a long-term uptrend:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and price > sma(200) and rsi(14) < 30

Stocks whose RSI just crossed back above 30:

exch(nyse,nasdaq) and type(stock) and price > 1 and advol(21) > 1
and rsi(14) ca 30

Related: Stochastic oscillator, MACD, Moving averages.