RSI (Relative Strength Index)

A momentum oscillator that measures the speed and size of recent price changes on a 0-100 scale.

What it is

RSI is a momentum oscillator developed by J. Welles Wilder Jr. and introduced in 1978 in his book New Concepts in Technical Trading Systems. It compares the magnitude of recent gains to recent losses over a set lookback period (most commonly 14 bars) and expresses the result as a single line that moves between 0 and 100. It is plotted in a separate pane below the price chart, usually with reference levels drawn at 30 and 70. RSI is descriptive, not predictive: it summarizes how price has behaved recently and gives no guarantee about what price will do next. No indicator can forecast price, and all trading carries risk of loss.

How it works

RSI looks back over a chosen number of bars (14 by default) and separates the price changes into upward moves and downward moves. It calculates an average of the up moves and an average of the down moves using Wilder's smoothing method (a running average closely related to an exponential moving average), so each new bar updates the running averages rather than recalculating them from scratch. The ratio of average gain to average loss (called relative strength) is then converted into a 0-100 reading. When recent gains dominate, the line rises toward 100; when recent losses dominate, it falls toward 0; when gains and losses are roughly balanced, it sits near 50. Shorter periods make the line more reactive and choppy; longer periods make it smoother and slower.

How traders read it

• Levels: many traders treat readings above 70 as 'overbought' and below 30 as 'oversold' — these describe stretched momentum, not an instruction to act, and a market can stay overbought or oversold for a long time in a strong trend.
• Midline: the 50 level is often read as a rough dividing line, with readings persistently above 50 interpreted as upward momentum and below 50 as downward momentum.
• Divergence: when price makes a higher high but RSI makes a lower high (or price makes a lower low while RSI makes a higher low), some traders read this as momentum weakening relative to price — it is a context clue, not a confirmed reversal.
• Failure swings: traders sometimes watch for RSI failing to push back into overbought/oversold territory after pulling away from it, reading it as fading momentum.
• Trend context: in strong trends, some practitioners shift the bands they watch (for example 40-80 in uptrends, 20-60 in downtrends) because the classic 30/70 levels can be reached early. Any interpretation is best combined with price structure and risk management rather than used on its own.

Common settings

Default length 14 on the closing price, with reference lines at 30 and 70 and an optional midline at 50. Shorter lengths (such as 7-9) are sometimes used for a faster, noisier reading; longer lengths (such as 21-25) for a smoother, slower one. Some traders watch 80/20 instead of 70/30 to reduce noisy readings in trending markets. RSI can be applied to any timeframe.

Strengths

• Simple, single-line 0-100 reading that is easy to interpret at a glance
• Works on any market and any timeframe
• Bounded scale makes overbought/oversold zones and the midline easy to reference consistently
• Widely used and well documented, and built into most platforms (for example ta.rsi in Pine Script)
• Often used as a momentum-context filter alongside price structure rather than as a standalone tool

Pitfalls to watch

• Overbought/oversold is not a signal: RSI can remain above 70 or below 30 for extended periods during strong trends, so reading those levels as automatic turning points can mean fighting the prevailing move.
• Lag: because RSI is built from averages of past price changes, it reflects what has already happened and can confirm moves late rather than anticipate them.
• Divergences can persist: RSI divergence can appear and then continue for many bars without any reversal, so it is unreliable on its own.
• Choppy in ranges and on short settings: shorter lookback periods produce frequent crossings of the reference levels, which can generate many noisy readings in sideways markets.
• No predictive power: RSI describes recent momentum only. It does not forecast price, and no indicator removes the risk of loss.

Pine v6 example

//@version=6
indicator("RSI Example", overlay = false)

length = input.int(14, "RSI Length", minval = 1)
src = input.source(close, "Source")

myRsi = ta.rsi(src, length)

plot(myRsi, "RSI", color = color.blue)
hline(70, "Overbought", color = color.gray)
hline(50, "Midline", color = color.new(color.gray, 50))
hline(30, "Oversold", color = color.gray)

Pro tip: Treat the 30/70 levels as descriptions of stretched momentum, not as triggers. RSI tends to be most informative when read in the context of the prevailing trend — for example, in an uptrend some traders watch whether pullbacks hold above the midline rather than waiting for a dip below 30. Pair it with price structure and a defined risk plan; this is educational context only, and no indicator removes the risk of loss.

Educational only — not financial advice, not a recommendation to trade. No indicator is predictive; trading involves substantial risk of loss.