Stock Market · Technical Analysis

RSI

What is RSI?

RSI (Relative Strength Index) is a momentum oscillator that measures the speed and magnitude of recent price changes. It oscillates between 0 and 100, and helps identify overbought and oversold conditions.

Developed by J. Welles Wilder in 1978, RSI is still one of the most used indicators globally.

How RSI is calculated

RSI compares the average gains vs average losses over a period (typically 14 days).

• If a stock goes up most days in 14 days → RSI is high
• If it goes down most days → RSI is low

The formula gives you a number from 0 to 100.

The standard zones

• Above 70 = Overbought (stock may be due for a pullback)
• Below 30 = Oversold (stock may be due for a bounce)
• 30–70 = Neutral zone (no strong signal either way)

> RSI above 70 doesn't mean sell immediately. In strong uptrends, RSI can stay above 70 for weeks, called 'staying overbought.'

14 daysthe default RSI period (can be changed, but 14 is most watched)

Divergence. RSI's most powerful signal

Divergence occurs when price and RSI move in opposite directions:

• Bullish Divergence: Price makes a lower low, but RSI makes a higher low. Momentum is improving even as price drops, bullish reversal likely.
• Bearish Divergence: Price makes a higher high, but RSI makes a lower high. Momentum is weakening even as price rises, bearish reversal likely.

Divergence is considered more reliable than simple overbought/oversold signals.

Practical application

Use RSI to identify when a trend is losing momentum, confirm entry signals from patterns, and avoid buying into exhausted moves.

Takeaway. RSI above 70 = overbought. Below 30 = oversold. RSI divergence (price and RSI moving opposite) is the most powerful signal.