RSI

RSI puts a single number on how fast and how far a stock has moved lately — it describes recent momentum, it does not forecast the next move.

The Relative Strength Index (RSI) is a momentum oscillator: a calculation that turns recent price changes into one number that swings between 0 and 100. It was introduced by J. Welles Wilder in 1978 and is one of the most widely watched indicators on a trading screen. The default look-back is 14 periods — 14 days on a daily chart, 14 hours on an hourly chart, and so on. The word “strength” here is narrow: RSI is comparing the size of recent up-moves to the size of recent down-moves. It is not measuring a company’s financial strength or anything about the business.

What the number is actually built from

Over the look-back window, RSI separates the periods where price closed higher from the periods where it closed lower, averages the size of each group, and forms a ratio of average gain to average loss. That ratio is then scaled onto the 0–100 line. The practical consequence is simple:

• When recent gains have been large relative to recent losses, RSI rises toward 100.
• When recent losses have dominated, RSI falls toward 0.
• When gains and losses have been roughly balanced, RSI sits near 50.

So RSI is a compressed summary of the recent past. Every input is a price that has already happened.

The 70 and 30 thresholds

By convention, a reading above 70 is called “overbought” and a reading below 30 is called “oversold.” These labels are descriptions of recent momentum, not instructions. “Overbought” means only that up-moves have strongly outweighed down-moves over the look-back window. It does not mean the stock is about to fall, and “oversold” does not mean it is about to bounce.

This matters most in a strong trend. In a sustained uptrend, RSI can stay above 70 for long stretches — weeks at a time — because the up-moves genuinely keep outweighing the down-moves. The same is true below 30 in a sustained downtrend. Reading every cross above 70 as “time to sell” would have you fighting the trend repeatedly, which is exactly where many people get hurt.

Worked example: RSI of 75 versus 25

Suppose a stock’s 14-day RSI reads 75. What that tells you, precisely, is that over the last 14 days the average up-day move has been large compared with the average down-day move — recent buying pressure has clearly dominated. It is a statement about the recent past, phrased as momentum. It says nothing on its own about whether day 15 is up or down.

Now suppose the reading is 25. The mirror applies: over the last 14 days, down-day moves have outweighed up-day moves, so recent selling pressure has dominated. Again, this is a description of where price has been, not a prediction of where it is going. A stock at RSI 25 can keep falling, and a stock at RSI 75 can keep climbing — the indicator is reporting recent behavior, not turning points.

RSI divergence

One pattern some traders watch is divergence: price makes a new high but RSI makes a lower high than its previous peak (bearish divergence), or price makes a new low but RSI makes a higher low (bullish divergence). The idea is that the momentum behind the move is fading even as price keeps printing extremes. Divergence is a description of weakening momentum, and it is widely watched, but it is not a reliable timing signal — price can diverge from RSI for a long time before anything changes, or not change at all. Treat it as one observation among many, not a trigger.

Honestly stated: RSI is widely used, but the academic evidence that it predicts returns on its own is mixed and weak. It is best understood as one input that describes recent price behavior, not a system that forecasts it. For two related momentum tools that lag price the same way, see MACD and moving averages.

Educational only — not investment advice. Options involve a substantial risk of loss and are not suitable for every investor.