RSI Explained: How the Relative Strength Index Is Calculated and Read

What RSI measures

The relative strength index compares the size of recent gains with the size of recent losses and puts the answer on a scale from 0 to 100. It was published by J. Welles Wilder in 1978 with a 14-period setting, and 14 is still the default on almost every chart.

The calculation runs in three steps. First, each bar's change is split into a gain (if the close rose) or a loss (if it fell), with the other side set to zero. Second, the gains and losses are averaged. The first average is a plain mean of the first 14 values; every one after that uses Wilder's smoothing, which is an exponential average with a long memory:

AvgGain(t) = (AvgGain(t − 1) × 13 + Gain(t)) / 14

The same line is run for losses. Third, the ratio of the two averages is squashed into the 0 to 100 range:

RS = AvgGain / AvgLoss and RSI = 100 − 100 / (1 + RS)

When gains and losses have been equal, RS is 1 and RSI is 50. When there have been no losses at all in the window, RSI is 100. Because the averages are smoothed rather than reset each bar, the reading on any bar depends on far more than the last 14 bars, which is why two charts with different amounts of history can show slightly different RSI values for the same date.

Overbought and oversold

The conventional lines are 70 and 30: above 70 the market is called overbought, below 30 oversold. What the numbers actually say is that recent gains have been more than about two and a third times recent losses (RS above 2.33), or the reverse. That is a statement about the recent past, not a forecast.

The most expensive mistake with RSI is reading overbought as a sell signal. In a strong uptrend RSI can stay above 70 for weeks, because the condition that puts it there, gains larger than losses, is the definition of the trend. Selling the first reading above 70 in a new bull market sells the best part of it.

A more useful frame treats the ranges as trend evidence. In an uptrend RSI tends to hold between about 40 and 80, finding support near 40 on pullbacks; in a downtrend it tends to hold between about 20 and 60, stalling near 60 on bounces. A reading that breaks out of its range, for instance RSI falling through 40 after months of holding it, says more about the trend than any single touch of 70 or 30.

Divergence

Divergence is the reading that earns RSI its place. When price makes a higher high but RSI makes a lower high, the second leg up was carried by smaller gains than the first: momentum has thinned even though price has not. That is bearish divergence. Bullish divergence is the mirror image: a lower low in price with a higher low in RSI.

Divergence is a warning, not a trigger. It can persist through several new highs before anything happens, and in a strong trend it often resolves by RSI catching back up rather than price turning. It becomes actionable when price confirms it, for example by closing below the swing low that sat between the two highs.

Wilder also described failure swings: RSI pushes above 70, pulls back, rises again but fails to exceed its previous peak, and then breaks below the pullback low. The pattern is read entirely on the indicator and does not require a divergence against price.

Settings and timeframes

Shorter settings such as RSI(7) or RSI(9) swing wider and reach the extremes more often; longer settings such as RSI(21) rarely do. Neither is more correct. A shorter RSI suits a chart used for timing entries within a trend; the standard 14 suits a chart used for judging the trend itself.

The timeframe matters more than the setting. RSI(14) on a daily chart summarises three weeks of sessions. On an hourly chart it summarises less than two sessions of a stock's trading, and readings above 70 and below 30 are routine. Reading a daily and an hourly RSI together, with the daily setting the direction and the hourly the timing, is the common way to use both.

On the desk

Every symbol page draws RSI(14) in its own pane under the candles, and the technical scoreboard folds RSI into one bounded score from −100 to +100 alongside trend and mean-reversion readings, so a stretched RSI is weighed against the trend it sits in rather than read alone.