RSI: The Relative Strength Index

What it measures

Over the last 14 periods by default, RSI takes the average gain on up periods and the average loss on down periods and expresses the ratio on a 0 to 100 scale. A market that has risen strongly for two weeks reads high; one that has fallen reads low. It measures the speed and size of recent moves, which is momentum.

Overbought and oversold

Above 70 the market has risen unusually fast; below 30 it has fallen unusually fast. In a range, those readings often precede a turn back towards the middle, and buying oversold or selling overbought near the range boundaries can work. In a trend they do not: a strong uptrend can stay above 70 for weeks, and selling because RSI is high is selling the strongest part of the move.

Divergence

Bearish divergence: price makes a higher high while RSI makes a lower high. The move continued but with less force. Bullish divergence is the mirror. Divergence does not time a reversal, and price can diverge for a long time before turning, but it is a warning that the trend is tiring and a reason to tighten stops or take partial profit.

Using it

• In a trend, use RSI pullbacks to 40 or 50 in an uptrend, 50 or 60 in a downtrend, as entry areas.
• In a range, use 30 and 70 near the range edges.
• Use divergence as a warning, not a trigger.
• Never trade RSI alone against the structure of the chart.

Key takeaways

• RSI measures momentum over 14 periods on a 0 to 100 scale.
• Overbought and oversold are useful in ranges and misleading in trends.
• Divergence warns that momentum is fading.
• Use it as a filter with structure, not as a standalone signal.