RSI Indicator Explained: Formula, the 70/30 Levels, and Divergence

The Relative Strength Index (RSI) is a momentum indicator that compares the size of recent price gains to the size of recent losses, producing a number between 0 and 100. It was introduced by J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems, and it remains one of the most widely used indicators.

Despite the name, it has nothing to do with comparing one stock's strength to another's; it measures a single stock's own recent momentum.

The Formula

For the standard 14-period setting:

1. Over the last 14 periods, find the average gain (sum of up-move amounts ÷ 14) and the average loss (sum of down-move amounts ÷ 14). Periods with no gain count as zero gain, and vice versa.
2. Relative strength (RS) = average gain ÷ average loss.
3. RSI = 100 − (100 ÷ (1 + RS)).

Worked example. Suppose the average gain is 1.2 and the average loss is 0.8. RS = 1.2 ÷ 0.8 = 1.5. RSI = 100 − (100 ÷ 2.5) = 100 − 40 = 60.

After the first calculation, Wilder's method uses a smoothing technique (each new average is updated as (previous average × 13 + current value) ÷ 14), which is why RSI values on different platforms can differ slightly depending on how much history they use.

What the Number Means

• High RSI means recent gains have been large relative to recent losses: strong upward momentum.
• Low RSI means recent losses have been large relative to recent gains: strong downward momentum.
• Around 50 means gains and losses have been about balanced.

The 70 and 30 Levels

By convention:

• RSI above 70 is labeled overbought.
• RSI below 30 is labeled oversold.

These are descriptive labels. An RSI above 70 only means the stock has risen substantially over the lookback window; it does not mean it must fall. Wilder himself used 70 and 30 as reference levels, and some traders use 80 and 20 in strongly trending markets.

Common Ways RSI Is Read

Overbought and oversold exits. Some traders watch for RSI to move back below 70 or back above 30, treating the exit from an extreme as more meaningful than being in it.

Divergence. If price makes a new high but RSI makes a lower high, momentum is weakening even as price advances. This is called bearish divergence; the reverse (price makes a lower low while RSI makes a higher low) is bullish divergence. Divergences are often described as early warnings and are also among the easiest signals to over-interpret, because price can keep trending long after one appears.

The 50 line. Some use RSI above or below 50 as a rough indication of whether momentum favors buyers or sellers.

Trend-dependent ranges. In a strong uptrend, RSI tends to hold above roughly 40 and often reaches 70 or higher; in a strong downtrend it tends to stay below about 60. Some analysts therefore adjust their interpretation to the trend.

Where RSI Misleads

• Strong trends. RSI can stay above 70 for weeks while price keeps rising. Treating "overbought" as a sell signal in those conditions means being early repeatedly.
• It is a momentum measure, not a valuation measure. RSI knows nothing about earnings or fundamentals.
• Settings change the picture. A shorter period produces more extremes and false alarms; a longer one produces fewer, later signals.
• Divergences can persist. A divergence is not a timed signal.

How It Compares

Like the stochastic oscillator, RSI is a bounded oscillator, but the two measure different things: RSI uses the size of gains versus losses, while the stochastic uses where the close falls in the recent range. For trend direction, see moving averages and Aroon.

What the Evidence Says

As with other technical indicators, academic evidence that RSI signals produce reliable after-cost profits is limited and mixed. See do chart patterns actually work for a discussion of why such claims are hard to verify.

This article is for educational purposes only and is not investment advice.