What Is RSI? Relative Strength Index Explained
RSI (Relative Strength Index) is a momentum indicator that measures the speed and magnitude of price changes. Learn how RSI works, how to read it, and its limitations.
The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder Jr. that measures the speed and magnitude of recent price changes. RSI oscillates between 0 and 100, providing signals about overbought and oversold conditions in a stock.
How RSI Is Calculated
RSI compares the average gains to average losses over a specified period (typically 14 days). The formula is: RSI = 100 - (100 / (1 + RS)), where RS is the average gain divided by the average loss over the period. Higher RSI values indicate stronger recent upward price movement.
How to Read RSI
RSI provides several types of signals that traders use to make decisions.
Overbought and Oversold
Traditionally, RSI above 70 suggests a stock may be overbought (potentially due for a pullback), while RSI below 30 suggests it may be oversold (potentially due for a bounce). However, these levels are not absolute—strong trends can keep RSI in extreme ranges for extended periods.
Divergence
When price makes a new high but RSI fails to make a new high, this bearish divergence may signal weakening momentum. The opposite (bullish divergence) occurs when price makes a new low but RSI does not.
Centerline Crossover
RSI crossing above 50 can indicate strengthening momentum, while crossing below 50 may indicate weakening momentum.
RSI Limitations
RSI can give false signals, especially in strong trends. A stock in a powerful uptrend can remain "overbought" (RSI > 70) for weeks. RSI works best when combined with other indicators, trend analysis, and volume confirmation—not as a standalone trading signal.
Key Takeaways
- •RSI measures momentum on a scale of 0 to 100.
- •RSI above 70 may suggest overbought conditions; below 30 may suggest oversold.
- •RSI works best in conjunction with trend analysis and other indicators.
- •No single indicator provides complete trading information.
Frequently Asked Questions
What is a good RSI value?
There is no single "good" RSI value. Context matters—a stock in a strong uptrend may sustain RSI above 70, while a stock in a downtrend may stay below 30. RSI is most useful when combined with trend direction and other analysis.
What period should I use for RSI?
The standard period is 14 days, which is what most platforms use by default. Shorter periods make RSI more sensitive (more signals, more noise); longer periods make it smoother (fewer signals, less noise).
Important Limitations
RSI is a momentum indicator, not a prediction tool. It does not predict future price movements. StockVantex displays RSI as one data point within a broader analytical framework—not as a standalone buy or sell signal.