RSI (relative strength index)

What RSI means

The relative strength index, or RSI, is a momentum indicator drawn in a panel below a price chart. It converts recent price changes into a single number between 0 and 100. The tool was introduced by the technical analyst J. Welles Wilder Jr. in the late 1970s, and it remains one of the most widely available indicators on trading platforms.

RSI compares the size of recent gains with the size of recent losses over a chosen number of periods. When gains dominate, the reading is high. When losses dominate, it is low. When they balance, it sits near 50. The standard setting is 14 periods, which means 14 candles on whatever timeframe the chart uses: 14 days on a daily chart, 14 hours on an hourly one.

Traders use RSI on shares, indices, currency pairs, commodities and crypto. It is a descriptive tool. It summarises how strongly price has moved lately; it does not know what happens next, and it is not a trading signal.

How it works

The calculation has three steps in plain words.

1. Over the lookback period, add up the closing-price gains from the up candles and divide by the number of periods to get the average gain. Do the same with the losses (as positive numbers) to get the average loss.
2. Divide the average gain by the average loss. This is called relative strength, or RS.
3. Convert it to the 0 to 100 scale: RSI = 100 - (100 ÷ (1 + RS)).

After the first period, Wilder's method smooths the averages. Each new average gain equals the previous average gain times 13, plus the current gain, all divided by 14, and the same for losses. This smoothing makes the line less jumpy than a simple average.

Common ways to read it:

• Levels: readings above 70 are often described as overbought and below 30 as oversold. Both words mean only that recent movement has been strong in one direction.
• Centre line: a reading above 50 suggests that gains have outweighed losses recently; below 50 suggests the opposite.
• Trend ranges: in strong uptrends RSI often stays between about 40 and 80, and in strong downtrends between about 20 and 60, so the classic 70 and 30 levels can be breached for a long time.
• Divergence: if price makes a new high but RSI makes a lower high, some traders see momentum fading. The reverse applies at lows.

A worked example

These numbers are illustrative only. Take a simplified 14-day window for a share. Over those 14 days, the up days add a total of 5.60 in price gains and the down days add a total of 2.80 in price losses.

1. Average gain = 5.60 ÷ 14 = 0.40.
2. Average loss = 2.80 ÷ 14 = 0.20.
3. RS = 0.40 ÷ 0.20 = 2.0.
4. RSI = 100 - (100 ÷ (1 + 2.0)) = 100 - 33.33 = 66.67.

A reading of about 67 shows gains outweigh losses by two to one, but it is below the conventional 70 mark.

Next day the share rises by 1.10. Wilder smoothing gives a new average gain of (0.40 × 13 + 1.10) ÷ 14 = (5.20 + 1.10) ÷ 14 = 0.45, and a new average loss of (0.20 × 13 + 0) ÷ 14 = 0.186. RS = 0.45 ÷ 0.186 = 2.42, and RSI = 100 - 100 ÷ 3.42 = about 70.8. The indicator has crossed 70, which means only that the last 14 periods have been dominated by gains. It does not say the price must fall.

Why it matters

RSI offers a compact way to see how stretched a move has been, which helps with context. A trader considering a position after a sharp rally can see at a glance how much of the recent movement was one-directional. It also standardises comparison: the 0 to 100 scale allows a quick look at many instruments without worrying about their price levels.

For costs and execution, the indicator itself has none, but how you act on it does. Signals based on short settings produce many alerts, and each trade pays a spread. A trader who acts on every 70 or 30 crossing on a five-minute chart may find that transaction costs consume much of the result. Platforms differ in how they calculate RSI slightly, in the smoothing and the price used, so values can differ by a point or two between charting packages.

How to use it in practice

1. Confirm the settings: the default is 14 periods on closing prices; check which your platform uses.
2. Identify the market regime first. Is price trending or ranging? Overbought and oversold readings are more useful in ranges.
3. Note divergences, but wait for confirmation from price structure, such as a break of a recent swing low.
4. Combine RSI with other tools, such as support and resistance, moving averages or volatility measures like ATR.
5. Test any rule on historical data across different markets and conditions, and include spreads and commissions.
6. Keep a record of how the indicator behaved in your trades, and adjust expectations based on evidence rather than the textbook.

Common mistakes and misconceptions

• Selling because RSI is above 70. In strong trends it can remain high for weeks while price keeps rising.
• Treating 30 as a floor. Prices can keep falling with RSI stuck below 30.
• Using RSI alone. A single indicator ignores structure, news and volatility.
• Changing settings until the past looks perfect. Over-fitting produces rules that fail on new data.
• Ignoring the timeframe. A reading on a one-minute chart says little about the daily trend.
• Believing divergence is a reversal call. It is frequently followed by continuation.

Risks and limitations

RSI is based only on past closing prices, so it lags. It cannot anticipate news, gaps or changes in liquidity. In sideways markets it produces many false hints, and in trending markets its extremes can mislead. Leveraged trading can magnify losses when an indicator-based idea fails, and CFDs carry a high risk of rapid loss. Treat readings as context and never as instructions.

How Brokeli looks at it

Brokeli does not issue indicator-based signals. We check whether a broker's platform provides RSI and other standard indicators, whether the settings are adjustable, and how costs such as spread and commission affect strategies that trade often. Those findings come from the published research snapshot for each broker.