The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder that measures the speed and change of price movements on a scale of 0 to 100. It calculates the average gain versus the average loss over a specified period (typically 14 days) to determine whether a security is exhibiting overbought (RSI above 70) or oversold (RSI below 30) conditions — helping investors identify potential entry and exit points based on momentum exhaustion.

How RSI Is Calculated

RSI is computed as: RSI = 100 − [100 ÷ (1 + RS)], where RS = average gain over N periods ÷ average loss over N periods. Wilder’s original specification uses 14 periods. A 14-day RSI above 70 suggests the asset has risen rapidly and may be temporarily overbought. Below 30 suggests it has fallen rapidly and may be temporarily oversold. The most important use is not the absolute level but divergences between RSI and price — when price makes a new high but RSI fails to confirm (negative divergence), it often signals weakening momentum.

RSI in Trend Following

While commonly used as a mean-reversion indicator (buying oversold, selling overbought), RSI is also valuable in trend-following contexts. In a strong uptrend, RSI frequently touches overbought levels without reversing — exits at RSI above 70 can prematurely terminate profitable trends. Trend-following applications often use RSI differently: treating sustained RSI above 50 as confirmation of a bullish trend and sustained RSI below 50 as confirmation of a bearish trend, rather than as overbought/oversold signals requiring immediate action.

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