RSI (Relative Strength Index) — what it is and how to read it
What is the RSI (Relative Strength Index) indicator, how to interpret it and when to use it in technical analysis.
What is RSI?
RSI (Relative Strength Index) — the relative strength indicator — is one of the most popular oscillators in technical analysis. It measures the speed and magnitude of price changes, helping assess whether a given instrument is overbought (too expensive) or oversold (too cheap).
RSI was developed by J. Welles Wilder Jr. in 1978 and has since become a standard tool for traders worldwide.
How does RSI work?
RSI takes values from 0 to 100. The standard calculation period is 14 sessions.
Key levels:
- RSI > 70 — the instrument is overbought. The price may have risen too quickly and a downward correction is possible
- RSI < 30 — the instrument is oversold. The price may have fallen too much and a rebound is possible
- RSI = 50 — neutral level, no clear signal
Formula (simplified):
RSI = 100 - (100 / (1 + RS))
RS = average gain from N sessions / average loss from N sessions
You don't have to calculate this manually — every trading platform calculates RSI automatically.
How to interpret RSI?
Buy and sell signals
- Buy: RSI drops below 30, then returns above → signal that overselling is ending
- Sell: RSI rises above 70, then drops below → signal that overbought conditions are ending
Divergences
The strongest RSI signals are divergences — when price and RSI move in opposite directions:
- Bullish divergence: price creates a new low, but RSI creates a higher low → possible upward reversal
- Bearish divergence: price creates a new high, but RSI creates a lower high → possible downward reversal
RSI limitations
- In a strong uptrend, RSI can remain in the overbought zone (>70) for a long time
- RSI alone doesn't give 100% certain signals — combine it with other indicators (e.g., MACD, moving averages)
- In low liquidity markets, RSI can give false signals
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