Relative Strength Index (RSI)
Original schematic showing the guide's principal visual relationships.
RSI = 100 − 100/(1 + average gain ÷ average loss), commonly using 14 periods.
Formula and components
A bounded momentum oscillator comparing the magnitude of recent gains with recent losses.
RSI = 100 − 100/(1 + average gain ÷ average loss), commonly using 14 periods.
How it works
The indicator transforms price, range, or volume observations over a selected lookback. Shorter settings react faster but create more noise; longer settings respond more slowly and emphasize the underlying regime. Always compare the reading with price structure and timeframe.
How to read it
Read 70/30 zones alongside trend ranges, swing failures, and divergence. In strong uptrends RSI can hold above 40; in downtrends it can remain capped near 60.
Practical example
RSI holding between roughly 40 and 80 while price makes higher highs can support an uptrend regime. A reading above 70 is strong momentum context, not an automatic sell signal; price structure must confirm any reversal.
Confirmation checklist
Compare the current reading with its centerline, thresholds, prior swing, and price action. Crossovers and divergences are context clues, not standalone entries.
Limitations and false signals
Overbought does not mean price must fall and oversold does not mean it must rise. Extreme readings can persist during strong trends.
Limitations and false signals
Frequently asked questions
What does this pattern or indicator describe?
A bounded momentum oscillator comparing the magnitude of recent gains with recent losses.
How should the signal be confirmed?
Read 70/30 zones alongside trend ranges, swing failures, and divergence. In strong uptrends RSI can hold above 40; in downtrends it can remain capped near 60. Compare the current reading with its centerline, thresholds, prior swing, and price action. Crossovers and divergences are context clues, not standalone entries.
What can cause a false signal?
Overbought does not mean price must fall and oversold does not mean it must rise. Extreme readings can persist during strong trends.