What Is RSI? The Relative Strength Index Explained
By Sean Wade · 6 min read ·
Quick answer
The Relative Strength Index (RSI) is a momentum indicator that compares the size of recent gains to recent losses and plots the result on a 0–100 scale. Readings above 70 are traditionally called overbought and readings below 30 oversold, but in strong trends RSI can stay at those levels for a long time.
Who created RSI?
RSI was developed by J. Welles Wilder Jr. and introduced in his 1978 book New Concepts in Technical Trading Systems. It is one of the most widely used momentum indicators and is built into almost every charting platform.
How is RSI calculated?
RSI looks back over a set number of periods — 14 is the default Wilder used. It averages the gains on up days and the losses on down days, then divides one by the other to get relative strength (RS).
The formula is RSI = 100 − 100 ÷ (1 + RS), where RS = average gain ÷ average loss. If a stock only went up during the lookback window, RSI approaches 100; if it only went down, RSI approaches 0.
What do RSI 70 and RSI 30 mean?
The classic levels are 70 and 30. Above 70 suggests price has risen quickly and may be stretched (overbought). Below 30 suggests price has fallen quickly and may be stretched to the downside (oversold). The 50 line is often used as a simple dividing line between bullish and bearish momentum.
Overbought does not mean "sell" and oversold does not mean "buy." These are descriptions of momentum, not signals on their own.
How traders commonly use RSI
RSI is most useful as one input alongside price structure, trend and volume. Common approaches include:
- Trend context: in an uptrend, RSI often holds between roughly 40 and 80; in a downtrend, between roughly 20 and 60.
- Divergence: price makes a new high while RSI makes a lower high (or the reverse at lows), hinting that momentum is fading.
- Failure swings: RSI breaks its own prior high or low before price confirms.
- Timeframe alignment: checking RSI on the daily and weekly charts to see whether they agree.
Common RSI mistakes
- Shorting a stock just because RSI is above 70 during a strong uptrend.
- Buying a falling stock just because RSI is below 30 — oversold can get more oversold.
- Using RSI alone without looking at support, resistance or the broader market.
- Changing the lookback period constantly to fit past results.
How Dragon Investing uses momentum data
Dragon AI reviews momentum readings such as RSI together with price action, analyst signals, sentiment and fundamentals, and every idea is reviewed by a human before it is published. RSI is context, never the whole decision.
This article is for educational purposes only and is not financial advice. Investing and options trading involve risk, including loss of principal. Do your own research and consider speaking with a licensed professional. See our disclaimer.