What it means
RSI = 100 − 100 ÷ (1 + average gain ÷ average loss), usually over 14 candles. Above 70 is overbought and below 30 oversold, but strong trends can stay there.
Example
Average gain 2, average loss 1: RS = 2, RSI = 66.7.
In practice
RSI puts momentum on a fixed scale, which makes it easy to compare one move with another. Traders use the 50 line as a simple trend gauge (above it, gains have outweighed losses), the 70 and 30 levels as extremes, and divergence as a warning that a move is tiring.
In an uptrend, pullbacks that hold the 40 to 50 area and turn up are a common place to look for entries.
What to watch for
The textbook rule of selling above 70 and buying below 30 works in ranges and fails in trends. RSI is derived from closing prices, so it cannot tell you anything that the chart does not already contain.
Related terms
3 terms- Overbought and oversoldOscillator readings at an extreme (RSI above 70 or below 30); they describe strength, not a turning point.
- DivergencePrice and an oscillator disagreeing: a higher high in price with a lower high in RSI, for example.
- MACDThe gap between a 12 and a 26-period EMA, with a 9-period signal line and a histogram.