RSI explained: how to use the Relative Strength Index

The Relative Strength Index (RSI), developed by J. Welles Wilder in 1978, is a momentum oscillator. It compares the magnitude of recent gains to recent losses over a lookback window (usually 14 periods) and outputs a value between 0 and 100. The standard interpretation: values above 70 suggest overbought conditions, below 30 suggest oversold.

The formula

RSI = 100 − (100 / (1 + RS)) where RS = average gain over N periods / average loss over N periods. Wilder used a smoothed (exponential) average rather than a simple one, which is how most charting platforms implement it today.

The classic trade setups

• Overbought / oversold reversion: enter against the trend when RSI crosses back below 70 (short) or above 30 (long)
• Divergence: price makes a new high but RSI fails to — bearish signal, and vice versa
• Center-line cross: RSI crossing 50 confirms the direction of momentum
• Trendline breaks on the RSI itself, drawn on the indicator panel

Where RSI breaks down

Strong trends will hold RSI above 70 (or below 30) for extended periods. Selling every time RSI prints 70 in a confirmed uptrend is a losing strategy — the indicator will keep printing 70 while the asset doubles. RSI is most useful in ranging markets and at the inflection points where a trend is exhausting; in trending markets, it's better used as a confirmation tool than a reversal trigger.