Relative Strength Index
Definition
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a 0–100 scale — readings above 70 indicate a stock may be overbought and extended to the upside, while readings below 30 indicate it may be oversold and extended to the downside.
Example
“The daily RSI hit 82 after a 6-day run without a significant pullback. That extreme reading combined with a bearish engulfing candle at prior resistance was my signal to tighten my stop and look for the reversal.”
Detailed Explanation
RSI was developed by J. Welles Wilder in 1978 and remains one of the most widely used indicators in technical analysis. The calculation compares the average gain on up days versus the average loss on down days over a 14-period lookback (the default). A reading near 100 means almost all the recent candles have been up; near 0 means almost all have been down. The 70 and 30 levels are the traditional overbought/oversold thresholds, but these aren't absolute — a strongly trending stock can keep RSI above 70 for extended periods while continuing to rise. RSI overbought in a screaming bull trend is different from RSI overbought after a 10-day parabolic spike.
The most powerful RSI signal isn't the overbought/oversold level itself but RSI divergence. Bearish divergence occurs when price makes a new high but RSI makes a lower high — it means the new price peak was made with less upside momentum than the prior peak, suggesting the move is running out of steam. Bullish divergence is the reverse: price makes a new low but RSI makes a higher low, suggesting selling momentum is weakening. Divergence setups on higher timeframes (daily, weekly) are particularly reliable because they represent sustained momentum shifts rather than short-term noise.
Context and timeframe are everything with RSI. On a 1-minute chart, RSI is extremely noisy and will oscillate between overbought and oversold constantly — it's nearly useless as a standalone signal at that granularity. On a 15-minute, 1-hour, or daily chart, it becomes much more meaningful. Cross-timeframe confirmation is the professional approach: if daily RSI is genuinely overbought (above 75) and 15-minute RSI is forming a bearish divergence, that's a much stronger signal than either timeframe alone. Always interpret RSI in the context of where price is in the larger trend and what's at the level where the signal is forming.