RSI (Relative Strength Index): What It Is, Formula and Chart Examples

RSI, or Relative Strength Index, is a momentum oscillator that measures the speed and size of price changes on a scale of 0 to 100. Traders use it to spot overbought or oversold conditions, then combine it with other analysis before planning a trade.

What Is RSI

RSI was developed by J. Welles Wilder and published in his book New Concepts in Technical Trading Systems, as well as in the June 1978 issue of Commodities magazine, according to Wikipedia. Since then it has become one of the most widely used oscillators in technical analysis, applied across stocks, forex, commodities, and crypto.

In simple terms, RSI compares the average size of price gains to the average size of price losses over a given period. When gains dominate losses, RSI climbs toward 100. When losses dominate, RSI falls toward 0. The term relative strength here differs from relative strength comparative, which measures one stock against the broader market or its sector; RSI purely measures price strength against its own recent history.

The Formula and Core Rules

The calculation happens in stages:

1. Calculate the change in closing price each period. If price closes higher than the previous close, that value is called U (upward change) and D is set to 0. If price closes lower, that value is called D (downward change, recorded as a positive number) and U is set to 0.
2. Calculate the average of U and the average of D over n periods (commonly 14) using Wilder's smoothed moving average (SMMA), which is mathematically equivalent to an exponential moving average with alpha = 1/n.
3. Calculate the Relative Strength (RS): RS = SMMA(U, n) divided by SMMA(D, n).
4. Convert RS into RSI: RSI = 100 minus (100 divided by (1 + RS)).

Some commercial platforms use a standard exponential moving average (EMA) instead of Wilder's original SMMA, which means RSI values can differ slightly between platforms even with the same period setting. The first moving average is typically seeded using a simple moving average of the first n values before smoothing continues from there.

How to Read It on a Chart

RSI moves between 0 and 100, with two key reference levels at 70 and 30. Common conditions traders watch for include:

• RSI above 70: signals strong buying momentum and overbought conditions, often read as a warning of potential pullback rather than an automatic sell signal.
• RSI below 30: signals strong selling momentum and oversold conditions, often read as a warning of potential rebound rather than an automatic buy signal.
• Extreme levels at 80/20 or 90/10: according to Wikipedia, these occur less frequently but indicate stronger momentum than the standard 70/30 levels.
• Bullish divergence: price makes a lower low while RSI makes a higher low, often read as a sign that selling momentum is fading.
• Bearish divergence: price makes a higher high while RSI makes a lower high, often read as a sign that buying momentum is fading.
• The 50 midline: RSI above 50 is sometimes used to confirm an upward bias, while RSI below 50 confirms a downward bias.

The signal weakens when RSI is used alone during a strong trend. In a powerful uptrend, RSI can stay above 70 for an extended period without price actually reversing, and the same applies in reverse during strong downtrends.

Common Settings

The default RSI setting is 14 periods with 70 and 30 as reference levels, matching Wilder's original formulation. Traders often adjust the period depending on their trading style.

Shorter periods react faster to price changes but produce more frequent false overbought/oversold signals. Longer periods generate fewer signals but tend to be more relevant for larger trends.

Step-by-Step Usage

1. Open a chart on TradingView or a stock/crypto trading app, then add RSI from the indicators menu.
2. Choose a timeframe matching your trading style, such as 15-minute for scalping or daily for swing trading.
3. Keep the RSI period at the default 14 when starting out, then adjust once comfortable reading its typical patterns.
4. Wait for candle close before drawing conclusions from RSI's position, since the value can still shift while the candle is forming.
5. Check whether RSI hits 70/30 at the same time price reaches a significant support or resistance level, since confirmation from two tools is stronger than one indicator alone.
6. Look for divergence patterns between RSI and price before deciding anything.
7. Set stop loss and target levels based on price structure (nearest support/resistance), not solely on the RSI number.
8. Log observations in a trading journal to see which patterns are relevant to your own style in the market you follow.

Chart Examples (Illustrative)

Example 1, an oversold scenario in crypto. Suppose BTC price (illustrative figure) drops from $65,000 to $58,000 over a few days, and the 14-period RSI falls to 24. A trader watching this notes an illustrative support level at $57,500. If a reversal candle appears in that area, a hypothetical trader could set an illustrative entry at $58,200, stop loss at $57,000, and target at $60,800, giving a risk-reward ratio of roughly 1:2.2. This is purely an illustration of the calculation, not a transaction recommendation.

Example 2, a bearish divergence scenario in stocks. Suppose an illustrative stock price rises from Rp3,000 to Rp3,450, forming a new high, but RSI, which was at 78 during the first high, only reaches 68 during the second high. This pattern reads as bearish divergence. A hypothetical trader wary of weakening momentum could mark an illustrative support level at Rp3,200 as a monitoring zone, with a stop loss above the recent high at Rp3,470 for a hypothetical short position, and a target at Rp3,150, producing a risk-reward ratio of about 1:1.5.

Combining RSI With Other Tools

RSI is rarely used alone because of its lagging nature. Some common combinations include:

• RSI with moving averages (50-day or 200-day): the moving average defines the broader trend direction, while RSI helps with entry timing within that trend.
• RSI with support/resistance: overbought/oversold signals become more meaningful when they coincide with price levels that have been tested repeatedly.
• RSI with volume: an RSI rise unaccompanied by significant volume is often considered less convincing than one backed by high volume.
• RSI with candlestick patterns: reversal patterns like doji or hammer appearing alongside an oversold RSI reading are often used as additional confirmation before entry.

What It Means for Traders

A few concrete things worth tracking, none of which are buy or sell instructions:

• Note when RSI hits 70 or 30 on your chosen timeframe, then check whether that level lines up with a meaningful support or resistance zone.
• Watch for divergence between RSI and price as one piece of additional confirmation, not a standalone trigger for opening a position.
• Match the RSI period to your trading style: shorter periods for scalping come with noisier signals, while 14 periods tends to suit daily swing trading.
• Wait for candle close before drawing conclusions from RSI's reading, to avoid misreading a value that's still forming.
• Plan stop loss and position size ahead of time, since RSI alone doesn't guarantee price direction, especially in sideways markets prone to repeated false signals.

Common Mistakes

• Treating RSI above 70 or below 30 as an automatic sell or buy signal, when in strong trends RSI can stay at extremes for a long time.
• Taking a position against the larger timeframe trend just because RSI is oversold on a smaller timeframe, while the dominant trend is still down.
• Entering before candle close, when the RSI value being used as reference can still change.
• Trading without a stop loss even when an RSI signal looks convincing.
• Stacking too many momentum indicators at once (RSI, stochastic, MACD) that essentially measure similar things, making the analysis redundant without adding new information.
• Ignoring sideways market context, where RSI can repeatedly bounce between 70 and 30 without any meaningful price movement.

Strengths and Limitations

RSI is easy to read and available on nearly every charting platform, whether for IDX stocks, crypto, or commodities. It helps identify potential overbought/oversold conditions and divergences that often precede a change in price direction.

But RSI remains a lagging indicator since its calculation is based on price data that has already occurred. Research cited by Wikipedia (Marek and Šedivá, 2017) tested RSI with standard parameters in randomized trials across stocks like Apple, Exxon Mobil, IBM, and Microsoft, and found RSI can still produce good results, but over longer periods a simple buy-and-hold strategy tends to outperform RSI-based strategies. RSI values can also differ between platforms depending on whether they use Wilder's original SMMA or a standard EMA. The 24-hour nature of crypto markets can also produce different RSI patterns compared to stocks, which only trade during exchange hours.