Relative Strength Index Explained: RSI Formula & Use

Updated 6 November 2026 · Standard formula, shown below

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price movements on a scale from 0 to 100. Developed by J. Welles Wilder Jr. and introduced in his 1978 book New Concepts in Technical Trading Systems, the RSI helps traders identify overbought and oversold conditions, as well as potential trend reversals. This page explains how the RSI is calculated, how to interpret it, and its common uses and limitations.

Background and Purpose

Wilder created the RSI to address a problem with traditional price charts: they show where price has been, but not the strength behind the move. A stock might rise 10% in a week, but is that rise gaining momentum or losing steam? The RSI quantifies momentum by comparing the average size of recent gains to the average size of recent losses. The result is a single number that fluctuates between 0 and 100, with readings above 70 generally considered overbought and readings below 30 considered oversold.

The RSI is a leading indicator, meaning it can signal a potential reversal before it appears on the price chart. This makes it popular among swing traders and day traders, but it is also used by longer-term investors to time entries and exits.

How the RSI Is Calculated

The standard RSI uses a 14-period lookback (often 14 days for daily charts, but it can be applied to any timeframe). The calculation involves several steps:

For each period, record the price change (close today minus close yesterday).
Separate gains (positive changes) and losses (negative changes, taken as absolute values).
Calculate the average gain and average loss over the lookback period. Wilder used a smoothed average (similar to an exponential moving average) for the initial values, but most charting platforms use a simple average for the first calculation and then smooth subsequent values.
Compute the Relative Strength (RS) as: RS = Average Gain / Average Loss.
Convert RS to an index: RSI = 100 – (100 / (1 + RS)).

In plain terms, if average gains equal average losses, RS = 1 and RSI = 50 (neutral). If gains are twice losses, RS = 2 and RSI = 66.7. If losses are twice gains, RS = 0.5 and RSI = 33.3. The formula ensures the RSI is always between 0 and 100.

Interpreting RSI Values

The most common interpretation uses fixed thresholds:

Above 70 – Overbought: Price has risen sharply and may be due for a pullback or consolidation. Some traders use 80 for stronger trends.
Below 30 – Oversold: Price has fallen sharply and may be due for a bounce or reversal. Some use 20 for stronger trends.
50 – Neutral: No significant momentum in either direction.
40-60 – No signal: The RSI is in a “no man’s land� where it provides little information.

However, these thresholds are not absolute. In a strong uptrend, the RSI can stay above 70 for extended periods, and in a strong downtrend, it can stay below 30. Therefore, many traders use the RSI in conjunction with trend analysis: in an uptrend, oversold readings below 30 may be buying opportunities; in a downtrend, overbought readings above 70 may be selling opportunities.

Common RSI Patterns and Signals

Beyond the basic overbought/oversold levels, traders look for specific patterns:

Divergence: When price makes a new high but the RSI makes a lower high (bearish divergence), it suggests weakening upside momentum. Conversely, when price makes a new low but the RSI makes a higher low (bullish divergence), downside momentum may be fading. Divergence is one of the most popular RSI signals.
Centerline cross: When the RSI crosses above 50, it indicates that average gains are now exceeding average losses, which can confirm an uptrend. A cross below 50 can confirm a downtrend.
Failure swing: When the RSI falls below 30, bounces above 30, then falls again but stays above its prior low, it can signal a bullish reversal. The opposite (a peak below 70, a pullback, then a higher peak) can signal a bearish reversal.
Support/resistance on the RSI itself: Some traders draw trendlines on the RSI indicator, just as they would on price, and look for breakouts.

Choosing RSI Settings

The default 14-period setting is a good starting point, but it can be adjusted to suit different trading styles:

Shorter periods (e.g., 2, 5, 9): More sensitive, generating more signals but also more false signals. Popular among short-term traders.
Longer periods (e.g., 20, 30): Smoother, fewer signals, but more reliable for identifying major tops and bottoms. Often used by swing traders and investors.
Adjusting overbought/oversold levels: In a strong trend, using 80/20 instead of 70/30 can help filter out noise. Some traders also use dynamic levels based on the RSI’s own volatility.

There is no “best� setting; it depends on the asset and the timeframe. It is wise to test different settings on historical data to see what works for a particular market.

Common Mistakes and Limitations

While the RSI is a useful tool, it has several pitfalls:

Ignoring the trend: Using overbought/oversold signals without considering the overall trend can lead to losses. In a strong uptrend, selling when the RSI hits 70 can mean missing out on further gains.
Over-reliance on divergence: Divergence can persist for a long time before a reversal occurs, and it can also be a sign of a trend continuing (especially in strong trends).
Using RSI in isolation: No single indicator is foolproof. Combining RSI with price action, support/resistance, and other indicators (like moving averages) increases the probability of success.
Misunderstanding “overbought� and “oversold�: These terms do not mean the price will reverse immediately. They only indicate that the move has been large and may be overextended. The price can remain overbought for a long time.
Not accounting for gaps: The standard RSI calculation uses closing prices, so gaps (price jumps between sessions) can distort the indicator.

RSI vs. Other Momentum Indicators

RSI is often compared to other momentum oscillators:

Stochastic Oscillator: The Stochastic compares the closing price to the price range over a period, while RSI is based on the ratio of average gains to average losses. Stochastic is more sensitive to short-term price action and can be more prone to false signals.
MACD (Moving Average Convergence Divergence): MACD is a trend-following momentum indicator that shows the relationship between two moving averages. It is slower than RSI and better for identifying trend direction rather than overbought/oversold conditions.
CCI (Commodity Channel Index): CCI measures the deviation of price from its statistical mean. It has no upper or lower bound, unlike RSI’s 0-100 range.

Each indicator has its strengths, and many traders use a combination. For example, using RSI for overbought/oversold and MACD for trend confirmation is a common pairing.

Frequently Asked Questions

What is the best RSI setting?

There is no universally “best� setting. The default 14 is a good starting point, but you can adjust it based on your trading style and the asset’s volatility. Shorter periods (e.g., 5) give more signals, while longer periods (e.g., 20) give fewer but potentially more reliable signals. Backtesting different settings on your chosen market can help you find what works.

Can RSI be used on any timeframe?

Yes, the RSI can be applied to any timeframe – from 1-minute charts to monthly charts. The interpretation remains the same, but the significance of signals may vary. On shorter timeframes, the RSI is more erratic and produces more false signals; on longer timeframes, signals are rarer but often more meaningful.

What does RSI 50 mean?

An RSI of 50 indicates that average gains equal average losses over the lookback period, meaning there is no net momentum in either direction. It is often used as a signal: a move above 50 suggests bullish momentum, while a move below 50 suggests bearish momentum. Some traders use the 50 level as a dynamic support/resistance for the indicator.

Is RSI a leading or lagging indicator?

RSI is generally considered a leading indicator because it can signal potential reversals before they appear on the price chart. However, because it is based on past price data, it is technically a lagging indicator. The leading nature comes from the interpretation of overbought/oversold conditions and divergences, which anticipate price moves.

Why does RSI stay above 70 in a strong uptrend?

In a strong uptrend, gains consistently outnumber losses, keeping the average gain high relative to the average loss. This pushes the RSI into overbought territory and can keep it there for an extended period. This is why it is important to consider the trend context – an RSI above 70 in a strong uptrend is not necessarily a sell signal; it may simply reflect the strength of the trend.

Can RSI be used for non-financial data?

While RSI was designed for financial markets, the underlying math can be applied to any time-series data where you want to measure momentum, such as economic indicators, weather data, or even sports statistics. However, the overbought/oversold thresholds (70/30) are calibrated for price data and may not be appropriate for other types of data without adjustment.

Method: the standard formula for this calculation, rounded as each result states. See how the calculators work or report an error.