What Is RSI (Relative Strength Index)?
RSI, the relative strength index, compares the size of recent up moves to recent down moves and reports the result on a scale of 0 to 100. Readings above 70 are called overbought and below 30 oversold, but in a trend the reading can stay at an extreme for a long time.
RSI is the most widely misread indicator in trading, and the misreading is specific: people treat 70 as a sell signal. The chart further down this page shows exactly what that costs, using numbers computed from the chart itself.
How it works
RSI compares the size of recent up moves to the size of recent down moves, then expresses the result on a scale of 0 to 100.
Over the last fourteen bars, add up how much price rose on the up bars and how much it fell on the down bars. If those two are equal, RSI is 50. If the up moves are larger, it reads above 50. If the down moves are larger, below.
So a high reading says price has been going up. It is a summary of what already happened, computed from the same bars you are looking at.
Note what is missing: nothing in the calculation knows about levels, trend, volume or time of day. It is one arithmetic operation on the last fourteen closes.
The 70 problem
This is the whole reason the indicator has a bad reputation.
Above 70 is conventionally called overbought, which sounds like a warning and is not one. On the chart above — and these values are calculated, not drawn — RSI first crossed 70 with price at 101.24. It then stayed above 70 on 17 separate bars, and price finished at 104.30.
Selling the first overbought reading meant selling 3.06 before the top.
The reason is structural. A strong uptrend is made of up bars, and RSI measures up bars. A persistent trend produces a persistent extreme reading, so the indicator does exactly what it was built to do while the naive interpretation of it fails.
Why the idea survives anyway
In a sideways market the extremes genuinely do mark the turns, because there is a ceiling and a floor for price to bounce between. The indicator has not changed — the market has.
This is why RSI feels reliable for a while and then stops without warning: it was being used in a range, and the market started trending.
The 50 line
The most useful line on the indicator is the one nobody talks about. Above 50, up moves have been bigger than down moves. Below 50, the reverse.
Used that way RSI becomes a filter rather than a signal — a quiet answer to “which direction has recently been winning” — and it has no threshold to argue about.
Length
A shorter length reacts faster and hits 70 and 30 far more often. That is not extra information, it is the same information with less smoothing — and more readings at the extreme means more readings that lead nowhere.
Divergence
Divergence is price making a higher high while RSI makes a lower one. On the chart above price rose from 101.68 to 102.13 while RSI fell from 71 to 68 — a genuine divergence in the maths, not a drawn one.
It means the second push was made of smaller up bars than the first. That is a true observation about momentum, and it is the best thing on the indicator.
A worked example
Take the trend chart and read it as a filter rather than a signal.
The decline. RSI is below 50 and price is falling. Both say the same thing; the useful conclusion is that this is not where you look for longs.
The turn. RSI crosses back above 50 and stays there. The character of the last fourteen bars has changed — up moves are now the bigger ones.
The first extreme. RSI hits 70. Nothing happens here. No trade, no exit. The reading is telling you the trend is strong, which is not a reason to bet against it.
The pullback. Price pulls back and RSI comes off its extreme without breaking 50. That is what a pullback inside a trend looks like on this indicator.
The entry comes from the chart, not the panel. RSI told you which direction was winning. The price level told you where to act, and market structure told you the price at which the idea was finished.
The original data
Across our study of 24,971 trading videos, 844 cover RSI. The median one gets 3,893 views, 81% never pass 50,000, and the median length is 8.9 minutes.
Here RSI is unusual. The corpus carries description text for 164 of those 844, and eighteen of those mention invalidation, failure or getting it wrong — about 11%, against zero of 253 for candlesticks and two of 236 for moving averages.
That is not because RSI is worse. It is because it fails so visibly, and so often, that it is hard to teach without admitting it.
When it fails
The market starts trending
Covered above and worth repeating, because it is the failure. Every overbought reading in a strong trend is a losing short, and there are a lot of them.
The divergence does not resolve
This is the same pattern as the divergence chart above and the outcome is opposite. Momentum slowing is not the same as momentum stopping — a move can slow, hold, and resume. Divergence is a description of the last two pushes, not a forecast of the next one.
You are trading the panel instead of the chart
The indicator has no idea where price is. Two identical readings at a major level and in the middle of nowhere mean different things, and the panel cannot tell them apart.
You found it afterwards
Every divergence that reversed is obvious in hindsight, and the ones that did not are not memorable enough to argue with. Cover the right-hand side before deciding what an indicator is worth.
Related
Moving averages have the same character — a smoothed summary of recent price that describes rather than predicts. The lag is easier to see there.
Market structure is what RSI cannot give you: a specific price at which the read is wrong.
And risk management is the difference between an indicator reading and a position, which is a gap no oscillator closes.
I treat this the same way I treat moving averages - as context rather than a trigger. A high reading tells me the recent bars have been mostly up, which I could have seen by looking at them. What it never tells me is where to get in or where I am wrong, and those are the only two decisions that actually cost money. If an indicator cannot answer those, it is a description, and I want it on the screen as a description rather than as a signal I feel obliged to act on.
— Michael Whitman, from this video
This page is educational, not financial advice. Test every idea on your own charts before risking money.