Relative Strength Index (RSI)

What is the Relative Strength Index (RSI)?

The Relative Strength Index (RSI) is a momentum oscillator that compares Wilder-smoothed gain and loss magnitudes on a 0-to-100 scale. The traditional setting uses 14 periods, and readings above 70 are labeled overbought and readings below 30 oversold. RSI measures one price series against its own recent upward and downward changes.

For performance against a benchmark, use comparative relative strength instead. It measures how one asset performs against another.

How is RSI calculated?

Take 15 closes to obtain the first 14 changes. Separate positive changes into gains and negative changes into positive loss magnitudes. Include zero in the other series for each observation.

Initialize each average using those 14 changes. For subsequent observations, update G = (13 × prior G + current gain) / 14 and L = (13 × prior L + current loss) / 14.

RSI = 100 × G / (G + L). With G = $0.60 and L = $0.30, RSI is 66.67. For positive G + L, equal averages give 50, zero losses give 100 and zero gains give 0.

RSI overbought and oversold levels

The conventional reference bands are 70 and 30. With positive losses, RSI above 70 means the gain-to-loss ratio exceeds 7/3; RSI below 30 means it is below 3/7.

Read the direction separately from the level. An RSI at 25 and rising describes a different sequence from an RSI at 25 and falling. Combine that movement with the price setup and the decision bar you set in advance.

RSI divergence and failure swings

Bearish divergence pairs a higher price high with a lower RSI high. Bullish divergence pairs a lower price low with a higher RSI low.

In the chart, price rises from $55.40 on bar 7 to $56.30 on bar 15, while RSI at those peaks falls from 74.69 to 69.81. That lower RSI high under a higher price high is the bearish divergence, momentum fading into the new high.

A failure swing reads the oscillator’s own pivots. In a bearish failure swing, RSI pushes above 70, pulls back, falls short of its prior peak on the next rally, then breaks the pullback low. Each step is known only when its bar closes, so the signal lands on the bar that breaks that low.

How traders use RSI

In a range, a return through 30 near support or through 70 near resistance is the setup. In a trend, RSI pullbacks that hold above the 50 centerline set up entries in the trend’s direction.

Set the period, input, bar interval, threshold or pivot rule, entry and exit. In a trend, Options Flow shows whether calls are bought at the ask on the pullback that holds 50, and the Options Profit Calculator prices each structure at your target, expiration and volatility.

Limitations of RSI

• Strong trends pin RSI. It can stay above 70 or below 30 for many bars, so wait for price to confirm a turn before you fade a threshold crossing.
• Match period, interval and loaded history before you compare two charts. The 14-period setting and the 70 and 30 bands are conventions, and Wilder smoothing carries its starting averages forward, so this chart’s seeds of $0.28 average gain and $0.32 average loss shape its early readings.
• Time the entry off price. A divergence sets up the trade, and its pivots are confirmed only after later bars print, so take the trigger from a price break such as a close below the prior swing low.
• Check volume and the bar range yourself. RSI reads close-to-close changes, so a wide-range bar that closes flat moves it no more than a quiet one.

Bottom line

RSI is the quickest read on which side has won the recent bars, scored from 0 to 100. Read it with its direction and the price structure around it, treat 70, 30, divergences, and failure swings as conditions, and set the trigger, decision bar, and exit before you act on a reading.