A measurement of both the speed and rate of change of price movements within a market
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The Relative Strength Index (RSI) is one of the most popular and widely used momentum oscillators. It was originally developed by the famed mechanical engineer turned technical analyst, J. Welles Wilder. The RSI measures both the speed and rate of change in price movements within the market.
Source
The values of the RSI oscillator, typically measured over a 14-day period, fluctuate between zero and 100. The Relative Strength Index indicates oversold market conditions when below 30 and overbought market conditions when above 70. It is frequently used by swing traders. They look for signals of waning or strengthening momentum in short to intermediate term price movements within a market. Overbought or oversold conditions often immediately precede short-term trend changes that present trading opportunities.
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Calculating the RSI
Calculation of the RSI, to be done thoroughly, requires a great deal of highly technical and complex explanations. To fully understand how the calculation is accomplished, traders and analysts should read Wilder’s own explanation. It is presented in his 1978 book, New Concepts in Technical Trading Systems.
However, the index can be broken down into a (fairly) simple formula:
RSI = 100 – [100 / (1 + (Average of Upward Price Change / Average of Downward Price Change)]
The Relative Strength Index – What to Watch Out For
Traditionally, the Relative Strength Index is considered to signal overbought conditions when above 70 and oversold conditions when under 30. The levels can be adjusted, however, to better fit the price movement of a specific security a trader is watching. If, for example, a security’s RSI consistently hits above the 70 mark or below the 30 mark without correctly forecasting a change in price trend, a trader might adjust the upper end to 80 and/or the lower end to 20 to get more reliable trading signals.
Traders should keep in mind that during periods of very strong trends, a security’s price may continue to rise for a long time after an oscillator such as the RSI signals “overbought” conditions in the market. The same caveat applies to extended downtrend price movement that may occur well after an RSI indication of a market being “oversold”.
“Normal” RSI Values and the RSI as a Divergence Indicator
Bullish and bearish markets play a big role in how the RSI behaves. During a bull market, RSI values normally sit in the 40 to 90 range, with the 40-50 range seen as support. In a bear market, the reading typically stays within the 10 to 60 range, with the 50-60 zone signaling resistance. These ranges are typical but may vary based on the settings for the index, as well as the strength of the underlying market trend for any given security.
In addition to the basic 70/80 or 30/20 readings, traders also watch for divergence between price movement and the value of the RSI. When price hits a new low or high that isn’t supported by a corresponding new low or high in the RSI reading, this can indicate an impending price reversal in the market.
An Example of RSI Divergence
The chart below shows an example of divergence between price and the Relative Strength Index. Near the center of the chart, as marked by a thick black line, the price of the security continues to decline, making a new low just before a market reversal to the upside begins around the end of July. However, the RSI (plotted in the lower chart window) does not follow suit and make a corresponding new low. Instead, it has already begun to turn to the upside near the beginning of June. The RSI is exhibiting a bullish divergence from price. As the chart’s subsequent price action reveals, this bullish divergence correctly forecasted an upcoming trend change, from downtrend to uptrend.
The Relative Strength Index is among the most popular technical indicators, helping traders determine potentially good buy entry points (when a security is oversold) and sell points (when a security is overbought). It is also frequently watched for divergence signals of possible upcoming trend changes.
Related Readings
Thank you for reading CFI’s guide on Relative Strength Index (RSI). To learn more about career paths and how to break into banking, please see these additional resources:
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FAQs
The relative strength index (RSI) provides short-term buy and sell signals. Low RSI levels (below 30) generate buy signals. High RSI levels (above 70) generate sell signals. The S&P 500's RSI suggests stocks may be expensive.
Is relative strength and RSI the same? ›
The difference between relative strength and RSI is essentially a difference of perspective. The relative strength tells about the value of a stock in comparison to another stock, index or benchmark, while the RSI tells about the performance of a stock in comparison to the recent performance of the same stock.
How is the RSI calculated? ›
Determine the relative strength of the asset by dividing the average gain by the average loss over the previous 14 trading days.
What is RSI 14 relative strength index? ›
The Relative Strength Index (14) – RSI is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. RSI (14) uses 14 periods to calculate values.
What RSI is too high? ›
The RSI oscillates between zero and 100. Traditionally the RSI is considered overbought when above 70 and oversold when below 30. Signals can be generated by looking for divergences and failure swings.
What should my RSI be set to? ›
There is not specifically a "good" RSI index. RSI values are indicators that help traders make decisions depending on their goals. RSI values below 30 usually indicate buy signals whereas values above 70 generate sell signals.
How to use relative strength index? ›
First, identify a previous time period to use. A time period is generally 14 days, but can be shorter or longer. Next, add up the average gains and divide by the average losses during your chosen time period. The calculation's solution, or value, is referred to as relative strength.
What is a strong relative strength? ›
What Is Relative Strength? Relative strength is a strategy used in momentum investing and in identifying value stocks. It focuses on investing in stocks or other investments that have performed well relative to the market as a whole or to a relevant benchmark.
How accurate is the RSI indicator? ›
Results from the RSI may be misleading when markets are trending so it should only be used during a ranging market.
Is RSI 100% accurate? ›
Limitations of the RSI
Like most technical indicators, its signals are most reliable when they conform to the long-term trend. True reversal signals are rare and can be difficult to separate from false alarms. A false positive, for example, would be a bullish crossover followed by a sudden decline in a stock.
One technical indicator that can be used in conjunction with the RSI and helps confirm the validity of RSI indications is another widely-used momentum indicator, the moving average convergence divergence (MACD).
What happens if RSI is 100? ›
So an RSI of 0 means that the stock price has fallen in all of the 14 trading days. Similarly, an RSI of 100 means that the stock price has risen in all of the 14 trading days. In technical analysis, an RSI of above 70 is considered an overbought area while an RSI of less than 30 is considered as an oversold area.
What is a good RSI 14? ›
Simply put, an RSI reading below 30 can be interpreted as a 'Buy' indication for a stock, while that above 70 can be seen as a 'Sell' signal. The average time period used to calculate RSI for a security is 14 trading days.
What is the formula for relative strength? ›
The Relative Strength Comparison indicator is calculated by dividing one security's price by a second security's price (the "base" security). The result of this division is the ratio, or relationship, between the two securities.
What does 14-day RSI at 80% mean? ›
The RSI is typically based on a 14-day time frame with high values being 70 or above, and low values being 30 or below. Levels such as 80 or 20 indicate a stronger trend in upward or downward momentum, respectively.
What is a good number for the RSI indicator? ›
What Is a Good RSI Indicator? Traders who are looking for investment opportunities should look for RSI values that hit 30 or fall below that level. This allows them to look for investment options that may be undervalued where the price may increase in the future.
Is RSI under 30 good? ›
Stocks with an RSI below 30 are typically considered oversold, suggesting a potential for price reversal or increase. This concise guide aims to help investors identify these stocks and understand the implications of their RSI readings, offering a fundamental tool for informed investment decisions.
Is 70 RSI good? ›
An RSI above 70 is often considered overbought, signaling that the stock might be due for a pullback. Conversely, an RSI below 30 indicates that the stock may be oversold and could see a rebound. RSI is a crucial tool for investors and traders because it helps identify potential entry and exit points.
Is 20 RSI good? ›
Technical Analysis: Stocks with Relative Strength Index (RSI) below 30 are considered oversold.
