The RSI was introduced by J. Welles Wilder in 1978 and is one of the most widely used momentum indicators. It moves between 0 and 100 and shows whether recent price changes have been dominated by gains or by losses. It is most useful for spotting stretched conditions and fading momentum, not for calling exact tops and bottoms.
How it’s calculated
- For each period, record the gain (close above prior close) or loss (close below prior close, as a positive number).
- Compute the average gain and average loss over 14 periods. Wilder’s method seeds them with a simple average, then smooths: new average = (previous average × 13 + current value) ÷ 14
- RS = average gain ÷ average loss
- RSI = 100 − 100 ÷ (1 + RS)
Standard reference levels are 70 (overbought) and 30 (oversold), with 50 as the dividing line between bullish and bearish momentum. Some traders use 80/20 in strong trends.
Example
After 14 days, a stock’s average gain is $1.20 and average loss $0.80.
- RS = 1.20 ÷ 0.80 = 1.5
- RSI = 100 − 100 ÷ 2.5 = 60
The next day closes $0.50 higher (gain 0.50, loss 0):
- Average gain = (1.20 × 13 + 0.50) ÷ 14 ≈ 1.150
- Average loss = (0.80 × 13 + 0) ÷ 14 ≈ 0.743
- RS ≈ 1.548 → RSI ≈ 60.8
Common mistakes
- Selling every reading above 70. In a strong trend, RSI can hold above 70 for weeks. Overbought describes momentum, not value.
- Trading divergence without confirmation. Divergence can persist through several new highs. Wait for a price signal such as a break of support or a reversal pattern like a double top.
- Ignoring the timeframe. A 15-minute RSI and a daily RSI can say opposite things; check the timeframe above yours.
- Using RSI alone. It works better alongside trend tools such as a moving average or MACD.
More context in RSI, MACD, ATR and EMA explained.
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Educational content — not financial advice.
Updated