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What RSI Measures
J. Welles Wilder Jr. introduced RSI in New Concepts in Technical Trading Systems, published in 1978. In this indicator, “relative strength” means the ratio of recent average gains to recent average losses; it does not mean comparing one asset’s performance with another security or market index.
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RSI is bounded between 0 and 100. Values near 50 indicate a relatively balanced gain-and-loss calculation; values nearer 100 reflect stronger recent upward momentum, while values nearer 0 reflect stronger recent downward momentum. The scale is a normalization tool, not a measure of whether an asset is cheap or expensive.
The RSI Formula
RSI = 100 − [100 ÷ (1 + RS)]
RS = Average Gain ÷ Average Loss
For a standard 14-period RSI, the initial average gain and average loss are calculated from the first 14 price changes. Later averages use Wilder’s recursive smoothing:
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New Average Gain = [(Previous Average Gain × 13) + Current Gain] ÷ 14
New Average Loss = [(Previous Average Loss × 13) + Current Loss] ÷ 14
For a period length of n, replace 14 with n and 13 with n − 1. Wilder’s smoothing resembles exponential smoothing in effect, using a factor of 1 ÷ n.
How to Calculate a 14-Period RSI
- Calculate each period’s price change, normally using closing prices.
- Record positive changes as gains and negative changes as losses; use the loss’s positive magnitude. An unchanged price produces zero gain and zero loss.
- For the first 14 changes, calculate the simple average gain and simple average loss.
- For each later period, update both averages with Wilder’s smoothing formulas.
- Divide average gain by average loss to get RS.
- Insert RS into the RSI formula to convert it to the 0–100 scale.
Worked example
Suppose the smoothed average gain is 1.20 and the smoothed average loss is 0.80. RS is 1.20 ÷ 0.80 = 1.50, so RSI is 100 − [100 ÷ (1 + 1.50)] = 60. This says the smoothed gain component is 1.5 times the loss component; it does not predict that the price will rise or establish that the asset is undervalued.
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If average loss is zero while average gain is positive, RSI is conventionally treated as 100. If average gain is zero while average loss is positive, RSI is 0. When both averages are zero, platforms may handle the unchanged-price case differently; check the platform’s documented convention.
How to Interpret RSI Readings
| Reading or pattern | Common interpretation | Important caveat |
|---|---|---|
| Above 70 | Traditionally called overbought; recent upward momentum is unusually strong. | It does not mean price must fall. |
| Below 30 | Traditionally called oversold; recent downward momentum is unusually strong. | It does not mean price must rebound. |
| Above 50 | Can support a bullish-momentum interpretation. | It is a heuristic, not a universal trading rule. |
| Below 50 | Can support a bearish-momentum interpretation. | Market regime and timeframe still matter. |
The traditional 70 and 30 levels are reference points, not automatic buy or sell signals. In a range-bound market, extreme readings may help identify conditions to investigate for mean reversion. In a persistent trend, RSI can stay elevated or depressed, and the same readings may reflect strong momentum rather than an imminent reversal. Fidelity describes typical RSI ranges that can shift with trend, including approximately 40–90 in bull markets and 10–60 in bear markets; actual ranges vary by security and settings.
Divergence and Failure Swings
Divergence
Bullish divergence occurs when price makes a lower low while RSI makes a higher low. Bearish divergence occurs when price makes a higher high while RSI makes a lower high. These patterns show that momentum is not confirming the latest price extreme; they do not prove that a reversal will happen immediately. Divergence may precede only a short correction or function as trend confirmation, so consider price structure and the broader trend.
Failure swings
A bullish failure swing can occur when RSI falls below 30, recovers above 30, holds above 30 during a later pullback, and then breaks above its prior RSI peak. A bearish failure swing reverses this logic around 70. These are conditional RSI patterns, not guarantees; confirmation and risk management remain important.
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Choosing a Period and Comparing Platform Values
Fourteen periods is Wilder’s conventional default. Shorter periods respond more quickly and generally produce more frequent extremes; longer periods respond more slowly and generally produce smoother readings. Choose a period based on the instrument, chart timeframe, strategy horizon, and a tested method. Do not assume that a very short-period RSI should be interpreted using the same expectations as RSI(14).
Two platforms can show different RSI values even when both display RSI(14). Differences can come from the input series, initialization, smoothing method, missing bars, session boundaries, corporate-action adjustments, rounding, or the amount of historical data loaded. Because recursive smoothing carries prior values forward, the seed and historical pre-roll can affect results.
For reproducible calculations, specify the input series, bar interval, period, initialization and smoothing method, missing-data policy, and rounding policy. Compare a long series of results with a trusted reference rather than relying only on the first visible value.
A Practical RSI Workflow
- Specify the asset, timeframe, session convention, and input price.
- Assess the market regime: uptrend, downtrend, range, or high-volatility transition.
- Choose a period suited to the intended holding horizon and document the calculation method.
- Read RSI in context: consider trend continuation, range conditions, centerline behavior, divergence, or failure swings.
- Seek confirmation from price action or another independent source of information.
- Define entry, invalidation, position size, and exit rules before acting.
- Test rules out of sample and account for transaction costs, spread, slippage, liquidity, and execution constraints.
Limitations and Risk
RSI is derived from historical price changes and describes recent momentum; it cannot establish fair value or guarantee future returns. A single oscillator reading is not a complete trading system. Technical signals can fail as market conditions change, and hypothetical or back-tested results may omit real execution effects. The CFTC warns that technical-analysis-based trading systems cannot guarantee profits and that hypothetical results may not reflect actual market conditions.
This article is for education, not individualized investment advice. Any trading decision should account for risk, costs, and the possibility of loss.
FAQ
What does RSI stand for?
RSI stands for Relative Strength Index. It compares recent average gains with recent average losses; it does not measure performance relative to a benchmark.
What is the standard RSI period?
The conventional setting is 14 periods. A period refers to the chart interval, so 14 periods means 14 bars on the selected chart.
Does an RSI above 70 mean a stock is overvalued?
No. Above 70 is traditionally called overbought and describes strong recent upward momentum relative to losses. It does not measure valuation or guarantee a price decline.
Why do two charting platforms show different RSI values?
They may use different input data, smoothing or initialization, historical data lengths, session handling, or rounding. Check each platform’s calculation settings and documentation before comparing values.
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