Relative Strength Index (RSI)

Technical Analysis

The RSI is a momentum oscillator from 0 to 100 that flags overbought conditions above 70 and oversold conditions below 30.

Relative Strength Index (RSI) — illustrative image

What is the RSI?

The Relative Strength Index (RSI), developed by J. Welles Wilder, is a momentum oscillator that measures the speed and size of recent price changes on a scale from 0 to 100. It is plotted below the main price chart and is one of the most widely used indicators for spotting overbought and oversold conditions.

How it’s calculated

The RSI, using its standard 14-period setting, compares the average size of recent gains to the average size of recent losses:

Calculate the average gain and average loss over the last 14 periods.
Relative Strength (RS) = average gain ÷ average loss.
RSI = 100 − [100 ÷ (1 + RS)].

The result oscillates between 0 and 100. Traditionally:

RSI above 70 suggests the market may be overbought (potentially due for a pullback).
RSI below 30 suggests the market may be oversold (potentially due for a bounce).
RSI near 50 suggests a lack of strong directional momentum either way.

Example

If EUR/USD rallies sharply and the 14-period RSI climbs to 78, a trader might view the pair as overbought and watch for signs of the rally stalling before considering a pullback trade — though in a strong trend, RSI can stay overbought for an extended period, so this is a caution flag, not an automatic sell signal.

RSI divergence

A widely followed RSI technique is divergence: when price makes a new high but the RSI makes a lower high (bearish divergence), or price makes a new low but the RSI makes a higher low (bullish divergence), it can hint that underlying momentum is weakening even as price extends, often ahead of a reversal.

Why it matters

The RSI gives traders a standardized way to gauge momentum and spot potentially stretched conditions across any market or timeframe. Like all oscillators, it is not infallible — overbought and oversold readings can persist through strong trends — so it works best combined with trend context, support/resistance, and disciplined risk management rather than used in isolation.