What Is the RSI Indicator and How to Use It

You calculate the Relative Strength Index (RSI), a momentum oscillator, over 14 periods by comparing average gains to average losses, then scale it from 0 to 100 using the formula RSI = 100 – [100 / (1 + RS)]. You identify overbought conditions above 70, signaling potential pullbacks, and oversold levels below 30, hinting at rebounds. In uptrends, you adjust oversold to 40-50; in downtrends, overbought drops to 50-60. You spot divergences, like price lower lows with RSI higher lows, for reversals. Delve further for swing rejections and MACD differences.

What Is the Relative Strength Index (RSI)?

The Relative Strength Index (RSI), a momentum oscillator that J. Welles Wilder Jr. developed in 1978, equips you with a powerful tool from his book “New Concepts in Technical Trading Systems.”

You measure the speed and magnitude of recent price changes by comparing up days’ strength to down days’ over a standard 14-period look-back.

Plot it as a line from 0 to 100 below your asset’s price chart; readings above 70 signal overbought conditions, while below 30 indicate oversold ones.

You use RSI to detect potential trend reversals, corrective pullbacks, or overextended moves in stocks and commodities.

It shines in trading range markets, but you find it less reliable in strong trends, where it stays overbought or oversold for long stretches.

How the RSI Works

You calculate the RSI’s momentum by first averaging gains and losses over 14 periods, treating up days as gains (down days as zero) and vice versa, then applying the formula RSI = 100 – [100 / (1 + Average Gain / Average Loss)], which smooths subsequent values using (previous average × 13 + current value) / 14.

You’ll see the RSI rise during strings of up days, reflecting stronger bullish momentum, and fall amid down days, showing bearish dominance, all plotted below your price chart on a 0-100 scale.

You interpret readings above 70 as overbought conditions, where upside momentum weakens and pullbacks loom, while those below 30 flag oversold states, priming assets for potential rebounds.

Momentum Calculation Process

To grasp how RSI calculates momentum, start with its core process: it measures the speed and magnitude of recent price changes over a standard 14-period look-back, separating gains from losses.

You treat gains as zero when calculating average losses, and vice versa, ensuring clean separation.

First, apply the core formula: RSI = 100 – [100 / (1 + Average Gain / Average Loss)].

This yields a value between 0 and 100.

For example, over 14 periods with 7 up days at 1% gain and 7 down days at 0.8% loss, you get RSI = 55.55.

Subsequent values smooth via Wilder’s exponential moving average: Current Average Gain = [(Previous Average Gain × 13) + Current Gain] / 14.

RSI rises with consecutive up days, as average gains strengthen relative to losses; it falls with down days due to the opposite pattern.

Overbought Oversold Ranges

RSI traders spot overbought conditions when the indicator hits 70 or above, signaling excessive upward momentum that often precedes pullbacks or reversals.

You spot oversold conditions at 30 or below, where downward momentum fades, hinting at potential rebounds.

RSI calculates these by comparing average gains to average losses over 14 periods, using the formula: RSI = 100 – [100 / (1 + Average Gain / Average Loss)].

Use this numeric list to apply overbought/oversold ranges effectively:

1. Standard thresholds: Watch 70+ for overbought sell signals, 30- for oversold buys, most reliable in trading range markets.
2. Trend adjustments: In uptrends, raise oversold to 40–50; in downtrends, drop overbought to 50–60 for better accuracy.
3. Confirm signals: Don’t trade extended RSI alone in strong trends—pair with other indicators to avoid false moves.

Calculating RSI

You start calculating RSI by determining the average gain and average loss over 14 periods, where you count only gains on up days for average gain (losses count as zero) and only losses on down days for average loss (gains count as zero).

Next, you compute relative strength (RS) as the ratio of average gain divided by average loss, then derive RSI with the formula RSI = 100 – [100 / (1 + RS)], creating an oscillator from 0 to 100.

For subsequent periods, you apply smoothing—calculate smoothed average gain as (previous average gain × 13 + current gain) / 14, and do the same for average loss—to refine the RSI formula basics.

RSI Formula Basics

Traders calculate the Relative Strength Index (RSI) over a standard 14-period look-back, where you treat gains on down days as zero and losses on up days as zero.

You first compute the initial RSI using the formula: RSI = 100 – [100 / (1 + Average Gain / Average Loss)], which yields a value between 0 and 100.

This relates the magnitude of recent up days to down days, measuring momentum.

For subsequent periods, you smooth results with Wilder’s exponential moving average:

1. Calculate Current Average Gain = [(Previous Average Gain × 13) + Current Gain] / 14.
2. Apply the same for Current Average Loss = [(Previous Average Loss × 13) + Current Loss] / 14.
3. Plug smoothed averages into the RSI formula.

For example, 7 up days at 1% gain and 7 down days at 0.8% loss give Average Gain of 0.5%, Average Loss of 0.4%, and RSI of 55.56.

Average Gain/Loss

Average gain and average loss form the core components you’ll use to calculate RSI over a 14-period look-back. You sum the percentage gains on up days, treat losses as zero, then divide by 14 to get average gain. Similarly, you sum percentage losses on down days, treat gains as zero, and divide by 14 for average loss.

Here’s an example table for five periods (extend to 14 for full calc):

Period	Gain/Loss
1	+1.2%
2	-0.8%
3	+0.5%
4	0%
5	-1.1%

Sum gains (1.7%), divide by 14: average gain = 0.121%. Sum losses (1.9%), divide by 14: average loss = 0.136%.

You compute relative strength (RS) as average gain divided by average loss. RSI = 100 – [100 / (1 + RS)], yielding 0-100.

Smoothing Subsequent Periods

Once you’ve calculated the initial 14-period average gain and average loss, you apply Wilder’s smoothing method to compute RSI for all subsequent periods, ensuring the indicator adapts smoothly to new price data.

This method weights recent price changes heavily, while retaining influence from prior data.

Follow these steps for smoothing:

1. Calculate smoothed average gain: Use [(previous average gain × 13) + current gain] / 14; treat losses as zero.
2. Calculate smoothed average loss: Apply [(previous average loss × 13) + current loss] / 14; treat gains as zero.
3. Compute RSI: First, find Relative Strength (RS) as smoothed average gain divided by smoothed average loss, then apply 100 – [100 / (1 + RS)].

You’ll refine momentum signals in trending markets, as this exponential smoothing responds responsively to new closes.

Why Is RSI Important?

Why does RSI matter in your trading decisions?

You rely on it to measure the speed and magnitude of recent price changes, spotting overbought conditions above 70, where prices may reverse after rising too fast, and oversold conditions below 30, signaling potential bounces from excessive declines.

Developed by J. Welles Wilder Jr. in 1978, this momentum oscillator, plotted below price charts, uses a 14-period default setting that balances sensitivity for swing and position trading.

You catch clear signals for trend reversals or pullbacks in trading ranges.

Watch for divergences: in bullish divergence, prices hit lower lows, but RSI forms higher lows, revealing weakening downtrends early.

Bearish divergence works oppositely.

You elevate reliability by pairing RSI with trendlines or moving averages, especially in ranging markets.

Using RSI With Trends

When you trade with trends, adapt your RSI levels to match the market’s direction, since the indicator behaves differently in uptrends and downtrends.

In uptrends, RSI stays above 30, often hitting 70; raise your oversold level above 30 to dodge false sell signals.

In downtrends, it lingers below 70, dipping to 30 or lower, so lower your overbought threshold below 70 for solid buy signals.

Use these strategies:

1. Confirm bullish signals, like RSI crossing above 30, only in uptrends for reliable entries.
2. Spot bearish signals, such as RSI dropping below 70, primarily in downtrends to catch momentum.
3. Watch for trend breakdowns: in uptrends, RSI failing 70 then falling below 30 warns of reversals; in downtrends, missing 30 before rallying above 70 signals shifts.

RSI Signals and Ranges

RSI signals hinge on key crossings and ranges that flag overbought or oversold conditions.

You spot oversold conditions when RSI crosses below 30, signaling potential buying opportunities, as the asset may rebound soon.

Conversely, RSI crossing above 70 indicates overbought conditions, suggesting selling opportunities before a price correction hits.

Adjust your expectations by trend.

In uptrends, RSI stays above 30, often hitting 70, so you avoid false sell signals.

In downtrends, it lingers below 70, frequently dropping to 30 or lower, warning of weakness.

You also catch bullish signals when RSI dips to 40–50 in uptrends, then reverses upward, acting as support after declines.

Bearish signals appear when it rises to 50–60 in downtrends, then turns down, confirming downside momentum.

RSI Divergences and Reversals

1. Bullish divergence: Price hits a lower low, but RSI forms a higher low, showing weakening downward momentum—you anticipate an upward reversal.
2. Bearish divergence: Price reaches a higher high, while RSI makes a lower high, indicating fading upward strength—you expect a price drop.
3. Confirm signals: Pair divergences or positive/negative reversals with trendlines, moving averages, since they’re less reliable in strong trends—you avoid false moves.

RSI Swing Rejections

Traders spot RSI swing rejections as powerful confirmation patterns that refine overbought and oversold signals, demanding multi-step validation before you act.

Developed by J. Welles Wilder Jr., these patterns filter false signals in trends, especially in ranging markets where RSI fails to retest extremes like 30 or 70, signaling momentum shifts.

For bullish swing rejection, watch RSI drop below 30 into oversold territory, cross back above 30, dip slightly without re-entering oversold, then break its recent high.

This confirms a bullish reversal with price action support.

In bearish swing rejection, RSI climbs above 70 into overbought, crosses below 70, peaks modestly without returning overbought, then breaches its recent low.

You’ll strengthen trades by waiting for these higher highs or lower lows after the swing.

The Difference Between RSI and MACD

You’ll distinguish RSI from MACD by noting how each captures momentum differently, building on swing rejections to spot broader trend shifts.

RSI measures momentum via a relative strength formula, using average gains and losses over a 14-period look-back, scaled 0-100; it flags overbought above 70, oversold below 30, plus divergences or swing rejections.

MACD, however, subtracts a 26-period EMA from a 12-period EMA to form its line, then compares it to a 9-period signal line for crossovers.

Compare them directly:

1. Measurement: RSI gauges price change speed/magnitude; MACD tracks short-term vs. medium-term EMA differences.
2. Signals: RSI uses thresholds/divergences; MACD relies on signal line crossovers.
3. Usage: Pair RSI’s reversal observations with MACD’s trend shifts, despite occasional contradictions.

Frequently Asked Questions

Can RSI Be Used for Crypto Trading?

Yes, you use RSI for crypto trading. You spot overbought conditions above 70 and oversold below 30, then buy low or sell high. You combine it with trends for better signals, avoiding false whipsaws in volatile markets like Bitcoin.

What RSI Settings for Day Trading?

You use 14-period RSI on 5-minute or 15-minute charts for day trading crypto. Buy when it dips below 30, sell above 70. Tweak to 9-period for faster signals; confirm with volume to avoid whipsaws.

How Reliable Is RSI in Ranging Markets?

You find RSI less reliable in ranging markets; it whipsaws with false signals as prices oscillate between support and resistance. You combine it with Bollinger Bands or ADX to filter noise and confirm true breakouts effectively.

Does RSI Work on Forex Pairs?

You use RSI effectively on forex pairs; it spots overbought conditions above 70 and oversold below 30 across majors like EUR/USD. You’re combining it with trends for reliable signals, though you’re watching volatility in ranging pairs.

Best Stop-Loss Using RSI Signals?

You set your best stop-loss using RSI signals by placing it just beyond the 70 level on longs (or 30 on shorts) after entry. Exit if RSI reverses through 70/30, confirming momentum shifts. Trail it fluidly as RSI pulls back 10-20 points for tighter protection.

Conclusion

You excel with the RSI indicator by calculating its 14-period value, which ranges from 0 to 100, signaling overbought conditions above 70 and oversold below 30. Combine it with trends for confirmation, spot divergences for reversals, and apply swing rejections to time entries. Unlike MACD, which tracks momentum crossovers, RSI excels in range-bound markets. Practice these signals on charts, and you’ll confidently integrate RSI into your trading strategy for precise buy and sell decisions.