Relative Strength Index (RSI)
A momentum oscillator measuring the speed of price changes. RSI ranges from 0 to 100, with readings above 70 suggesting overbought conditions.
The Relative Strength Index (RSI) is a momentum oscillator that measures the magnitude of recent price changes to identify overbought or oversold conditions. RSI oscillates between 0 and 100.
Formula
RSI = 100 - (100 ÷ (1 + RS))
where RS = Average Gain over N periods ÷ Average Loss over N periods
The standard period is 14 days. RSI calculates the average of up-days versus down-days over the last 14 periods.
Example
Tesla (TSLA) trades with high momentum. An RSI of 75 suggests TSLA is overbought—it has risen so sharply that many traders expect a pullback soon. Conversely, an RSI of 25 suggests TSLA is oversold and may be due for a bounce.
How to Interpret It
- RSI > 70: Overbought condition. The stock has risen sharply; a pullback may be coming.
- RSI < 30: Oversold condition. The stock has fallen sharply; a bounce may be coming.
- RSI 40-60: Neutral zone, no strong momentum signal.
- RSI rising from below 50 to above 70: Uptrend accelerating.
- RSI falling from above 50 to below 30: Downtrend accelerating.
- Divergences: If price hits a new high but RSI doesn't, that divergence suggests momentum is weakening.
Limitations
- RSI overbought/oversold signals work better in choppy markets than in strong trending markets.
- In a strong uptrend, RSI can stay above 70 for a long time without a pullback.
- A stock can be overbought and keep rising, or oversold and keep falling.
- RSI is backward-looking; it doesn't predict future price movement.
- Different time periods (14, 21, or 7 days) produce different RSI values and signals.