What Is RSI — The Relative Strength Index Explained
RSI is one of the most widely used indicators in trading. Here's how it actually works, what its signals mean, and the most common mistakes traders make with it.
Technical Analysis · July 1, 2026 · 5 min read
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. in 1978. It measures the speed and magnitude of recent price changes to assess whether an asset is overbought or oversold. RSI is displayed as a line that moves between 0 and 100. Traditionally, readings above 70 indicate overbought conditions (potential reversal to the downside), and readings below 30 indicate oversold conditions (potential reversal to the upside). It is one of the most widely used technical indicators — and one of the most misused.
How RSI Is Calculated
RSI is calculated over a lookback period (default 14 periods): RSI = 100 - (100 / (1 + RS)), where RS = Average Gain / Average Loss over the lookback period. If a stock has gone up 10 out of the last 14 days for an average gain of 1%, and down 4 days for an average loss of 0.5%, the RS is 2 and the RSI is ~67. The calculation is less important than understanding what it measures: RSI above 50 means recent gains are outpacing recent losses (bullish momentum). RSI below 50 means recent losses are outpacing gains (bearish momentum).
The Overbought/Oversold Trap
The most common RSI mistake: treating overbought (>70) as a sell signal and oversold (<30) as a buy signal. In strongly trending markets, RSI can stay overbought for weeks while price continues rising. Shorting because RSI hit 75 in a bull trend is one of the most reliable ways to lose money. The correct interpretation: in a ranging market, overbought and oversold are useful reversal signals. In a trending market, they are trend continuation signals — the trend is strong enough to keep momentum elevated.
RSI Divergence: The Real Signal
The most reliable RSI signal is divergence: when price makes a new high but RSI makes a lower high (bearish divergence), or when price makes a new low but RSI makes a higher low (bullish divergence). This divergence shows that momentum is weakening even as price makes new extremes — often a warning that the trend is losing steam. RSI divergence is not an entry signal by itself, but combined with a key resistance/support level and a confirming price action candle, it is one of the highest-quality reversal setups available.
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