RSI
A 0 to 100 score that shows how stretched a move is, and why 'overbought' doesn't mean 'about to fall'.
How stretched is the move?
Stretch a rubber band. The further you pull, the more it wants to snap back. But sometimes you just keep pulling. , the Relative Strength Index, is a score from 0 to 100 that shows how stretched a price move is. J. Welles Wilder created it in 1978, and most apps still use his setting: the last 14 candles.
The idea in one sentence
RSI compares the size of the recent up moves to the size of the recent down moves.
- Mostly up moves: RSI is high.
- Mostly down moves: RSI is low.
- About even: RSI sits near 50.
Work one out
Real RSI uses 14 days. We'll use 4. Here are four days of price changes:
- Day 1: up $3
- Day 2: up $2
- Day 3: down $1
- Day 4: up $2
Add the ups: 3 + 2 + 2 = 7. Add the downs: 1. Now find what share of all the movement was up:
RSI = ups ÷ (ups + downs) × 100 = 7 ÷ 8 × 100 = 87.5
That's a very high reading. Almost all the movement was up. Wilder wrote the formula in a different way, with averages and a smoothing step, so real numbers come out a little different. But the idea is the same: what share of the recent movement was up.
The 70 and 30 lines
RSI is drawn in its own panel under the chart, with two lines:
- Above 70: . Price has risen a lot, fast.
- Below 30: . Price has fallen a lot, fast.
These are the standard levels. Some traders use 80 and 20 when they want fewer, stricter readings.
How traders read it
- Stretched moves. In a sideways market, RSI above 70 often shows up near the top of the range, and below 30 near the bottom.
- The 50 line. RSI above 50 means up moves have been bigger lately. Below 50 means down moves have been bigger. Some traders use it as a quick trend check.
- Divergence. Sometimes price and RSI disagree. That's important enough to get its own lesson soon.
Where it fails
"Overbought" sounds like "about to fall." It isn't. It only means price went up a lot, quickly. In a strong uptrend, RSI can stay above 70 for weeks while price keeps climbing. A beginner who bets on a drop every time RSI hits 70 can lose over and over during a great trend.
The same goes for oversold. During a crash, oversold can get even more oversold. A low RSI doesn't put a floor under price.
Remember
- RSI is a 0 to 100 score comparing recent up moves to down moves, usually over 14 candles.
- Above 70 is overbought. Below 30 is oversold.
- Overbought doesn't mean "must fall," and oversold doesn't mean "must rise."
- RSI works best in sideways markets and can stay extreme for a long time in strong trends.
Check yourself
1. What's the standard number of candles for RSI?
2. The ups add up to 6 and the downs add up to 2. Using our simple method, what's the RSI?
3. RSI reads 82. What does that mean?
4. In a strong uptrend, can RSI stay above 70 for weeks?
Next lesson: Stochastic
Money Tree School is education, not financial advice. Examples use made-up or historical numbers to show how things work; they are not recommendations to buy or sell anything. Markets can lose money.