RSI (Relative Strength Index)
A momentum oscillator measuring the speed and change of price movements on a 0–100 scale.
The Relative Strength Index (RSI), developed by J. Welles Wilder in 1978, is a momentum oscillator that measures the speed and magnitude of recent price changes to evaluate whether a security is overbought or oversold. Calculated as a 14-period ratio of average gains to average losses, RSI produces a value between 0 and 100. Readings above 70 are conventionally interpreted as overbought conditions — potential exhaustion zones. Readings below 30 indicate oversold conditions — potential capitulation zones. RSI divergence (price making new highs while RSI makes lower highs, or vice versa) is a more sophisticated signal, often foreshadowing trend reversals before they manifest in price.
RSI above 70 indicates overbought conditions — not necessarily a sell signal, but a warning that the move may be extended. RSI below 30 indicates oversold — a potential bounce zone. In strong trends, RSI can remain in overbought/oversold territory for extended periods.
Bearish RSI divergence: price makes a new high but RSI makes a lower high. This suggests weakening momentum and potential reversal. Bullish RSI divergence: price makes a new low but RSI makes a higher low — suggesting the selling is losing steam.
In a strong uptrend, RSI tends to oscillate between 40–80 rather than 30–70. In a downtrend, it oscillates between 20–60. Redefining the 'overbought' and 'oversold' zones based on the prevailing trend reduces false signals significantly.
RSI is most useful when combined with key price levels. An RSI reading below 30 at a major support zone is a far stronger setup than an RSI of 28 in the middle of a downtrend with no structural support nearby.
RSI is a lagging-to-coincident indicator — by the time it flashes extreme readings, the move has already happened. In strong trending markets, stocks can remain overbought or oversold for weeks or months, causing traders who fade on RSI alone to be repeatedly wrong. It also doesn't account for fundamental changes — a stock can have an RSI of 25 because it's genuinely broken, not oversold. Never use RSI in isolation from the broader price structure, volume, and fundamental picture.