Relative Strength Index (RSI)
Developed by J. Welles Wilder Jr. · 1978
Quick Answer
The Relative Strength Index (RSI) is a bounded momentum oscillator that measures the speed and magnitude of recent price changes on a 0-100 scale. Introduced by technical analyst J.
What is the Relative Strength Index?
The Relative Strength Index (RSI) is a bounded momentum oscillator that measures the speed and magnitude of recent price changes on a 0-100 scale. Introduced by technical analyst J. Welles Wilder Jr. in his 1978 book "New Concepts in Technical Trading Systems", the RSI has become one of the most widely used indicators in forex and equity trading. Its mathematical simplicity, clear overbought and oversold thresholds, and effectiveness at spotting momentum divergences are why professional traders still rely on it four decades after its introduction. Traders use the RSI to identify potential reversal zones, measure trend strength, and confirm breakouts in conjunction with price action.
How It Works
The RSI compares the magnitude of average gains to average losses over a fixed lookback period, traditionally 14 candles. When recent gains dominate recent losses, the RSI rises; when recent losses dominate, it falls. The indicator is bounded between 0 and 100, which makes it directly comparable across instruments and timeframes. Wilder defined readings above 70 as "overbought" and readings below 30 as "oversold", though these thresholds are flexible and many professional traders shift them to 80/20 for stronger filters or 60/40 for earlier trend-following signals. Beyond the absolute levels, the RSI is especially valuable for spotting divergence — when price makes a new high but the RSI fails to confirm, momentum is deteriorating and a reversal becomes more likely.
Formula
RSI = 100 - (100 / (1 + RS))
where RS = Average Gain over N periods / Average Loss over N periods
Typical N = 14. Average gains/losses use Wilder's smoothing (modified moving average).How to Read the RSI
- 1RSI > 70: overbought — upside momentum may be exhausted, pullback possible
- 2RSI < 30: oversold — downside momentum may be exhausted, bounce possible
- 3RSI 50 crossover: momentum shift — bullish above 50, bearish below
- 4Bullish divergence: price prints a lower low while RSI prints a higher low
- 5Bearish divergence: price prints a higher high while RSI prints a lower high
- 6Failure swing: RSI fails to exceed prior overbought/oversold peak, warning of reversal
- 7Trending markets: RSI can remain above 70 or below 30 for extended periods
Strengths and Weaknesses
Strengths
- +Bounded 0-100 scale makes comparison across instruments straightforward
- +Excellent at spotting momentum divergence against price
- +Works on every timeframe from 1-minute to monthly
- +Built into every major platform — MT4, MT5, cTrader, TradingView
- +Requires no parameter tuning beyond the lookback period
Weaknesses
- −Gives false overbought signals during strong uptrends — price can stay above 70 for weeks
- −Gives false oversold signals during strong downtrends
- −Lagging by nature — confirms moves that have already started
- −The 14-period default may be too slow for scalpers and too fast for position traders
- −Divergence signals can appear long before price actually reverses
Best Timeframes
All timeframes. 1H and 4H are the most common sweet spots for swing traders. Scalpers often use the 5-minute chart with a shortened period (7 or 9). Position traders apply it to daily and weekly charts.
Best for: Range-bound markets where overbought/oversold thresholds reliably mark turning points, and spotting divergence in established trends.
Example Strategy
RSI Divergence Swing: On the 4-hour chart, wait for price to make a fresh swing high while the RSI prints a lower high (bearish divergence). Enter short on a break of the most recent swing-low trendline, place a stop above the divergence high, and target the prior support zone for a minimum 2:1 risk-reward. Skip the trade if the daily trend is strongly up, because divergence in a strong trend often fails.
This example is educational, not financial advice. Always backtest any strategy and manage risk with appropriate position sizing.
Related Indicators
Brokers That Offer the RSI
Any broker with MetaTrader 4, MetaTrader 5, or cTrader supports the RSI as a standard indicator. Below are our top EU-regulated picks.
Frequently Asked Questions
What is the Relative Strength Index (RSI)?
The Relative Strength Index (RSI) is a bounded momentum oscillator that measures the speed and magnitude of recent price changes on a 0-100 scale. Introduced by technical analyst J. Welles Wilder Jr. in his 1978 book "New Concepts in Technical Trading Systems", the RSI has become one of the most widely used indicators in forex and equity trading. Its mathematical simplicity, clear overbought and oversold thresholds, and effectiveness at spotting momentum divergences are why professional traders still rely on it four decades after its introduction. Traders use the RSI to identify potential reversal zones, measure trend strength, and confirm breakouts in conjunction with price action.
Who developed the RSI?
RSI was developed by J. Welles Wilder Jr. in 1978.
What is the formula for the RSI?
RSI = 100 - (100 / (1 + RS)) where RS = Average Gain over N periods / Average Loss over N periods Typical N = 14. Average gains/losses use Wilder's smoothing (modified moving average).
What timeframes work best with RSI?
All timeframes. 1H and 4H are the most common sweet spots for swing traders. Scalpers often use the 5-minute chart with a shortened period (7 or 9). Position traders apply it to daily and weekly charts.
What is RSI best used for?
Range-bound markets where overbought/oversold thresholds reliably mark turning points, and spotting divergence in established trends.