RSI (Relative Strength Index)
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and size of recent price changes on a scale from 0 to 100.
Developed by J. Welles Wilder Jr. in 1978, RSI compares the average gains on up days with the average losses on down days, usually over 14 periods. The formula is RSI = 100 - 100 / (1 + RS), where RS is average gain divided by average loss.
Traditional readings above 70 are considered overbought, suggesting the price has risen quickly and may be due for a pause or pullback. Readings below 30 are considered oversold. The 50 level is sometimes used to judge whether momentum is positive or negative.
Traders also look for divergences: if a stock makes a new high but RSI makes a lower high, upward momentum may be weakening.
RSI has limits. In strong trends, it can stay overbought or oversold for long periods, so selling simply because RSI exceeds 70 can mean exiting a strong uptrend early. Many traders adjust thresholds, for example 80/20, or combine RSI with trend tools. Example: if average gains are twice average losses, RS = 2 and RSI is about 66.7.