What Is RSI (Relative Strength Index)?

The Relative Strength Index (RSI) is a popular technical analysis indicator that measures the speed and strength of a stock’s recent price movements. It helps traders identify whether an asset may be overbought or oversold.

Developed by J. Welles Wilder Jr. in 1978, RSI is one of the most widely used momentum indicators.

How RSI Works

• RSI ranges from 0 to 100.
• It compares the average gains and losses over a specific period.
• The default setting is 14 periods.

RSI Levels

• Above 70: Overbought – the asset may be due for a pullback.
• Below 30: Oversold – the asset may be ready for a rebound.
• Around 50: Neutral – no strong bullish or bearish momentum.

How Traders Use RSI

🟢 Overbought Signal

When RSI rises above 70, it indicates strong buying momentum. This doesn’t guarantee a price drop, but it suggests the asset may be overextended.

🔴 Oversold Signal

When RSI falls below 30, it indicates strong selling pressure. This doesn’t guarantee a price rise, but it suggests the asset may be undervalued.

📈 Trend Confirmation

• RSI above 50: Bullish momentum.
• RSI below 50: Bearish momentum.

🔄 RSI Divergence

A divergence occurs when the price and RSI move in opposite directions.

• Bullish Divergence: Price makes a lower low while RSI makes a higher low, suggesting selling pressure may be weakening.
• Bearish Divergence: Price makes a higher high while RSI makes a lower high, suggesting buying momentum may be weakening.

Example

Imagine a stock has been rising for several days, and the RSI reaches 75.

• The stock is considered overbought.
• Some traders may wait for confirmation before selling or taking profits.

Later, the RSI drops to 25.

• The stock is considered oversold.
• Some traders may look for a buying opportunity if other indicators also support it.

Tips for Using RSI

• Use RSI together with moving averages, volume, and support/resistance levels.
• Don’t buy or sell based solely on RSI.
• In strong uptrends, RSI can remain above 70 for extended periods.
• In strong downtrends, RSI can remain below 30 for extended periods.

Key Takeaway

The Relative Strength Index (RSI) is a momentum indicator that helps traders gauge the strength of price movements and identify potential reversal areas. While RSI is a valuable tool, it is most effective when combined with other technical indicators and sound risk management.