What Is RSI? The Relative Strength Index Explained

The Relative Strength Index (RSI) is a momentum oscillator that compares the size of recent gains with recent losses in a price, on a scale from 0 to 100.

RSI is one of the first indicators people add below a chart, usually with two lines drawn across it at 70 and 30. This page covers where the index comes from, how it is computed step by step, a worked example with invented prices, why the smoothing method changes the number, what the 70 and 30 lines and the other common readings describe, and why the same chart can show two different RSI values on two platforms. It is descriptive throughout.

Where RSI comes from

J. Welles Wilder Jr. introduced the Relative Strength Index in his 1978 book New Concepts in Technical Trading Systems. He used a look-back of 14 periods, which remains the usual default, and treated readings above 70 as overbought and below 30 as oversold. Those two words name zones on the scale. They describe how one-sided the recent moves have been, not what comes next.

The name causes confusion. RSI compares a series with its own recent history. It is not relative strength in the sense of one stock measured against another or against an index, which is a separate calculation: Kresmion's relative strength board, which opens with a free account, for example compares each asset's moves with its class benchmark.

How RSI is calculated

RSI is built from period to period price changes, usually close to close.

1. For each period, record the change from the previous close. A rise is a gain and the loss for that period is zero; a fall is a loss, recorded as a positive number, and the gain is zero. 2. Over the first 14 changes, the average gain is the sum of the gains divided by 14, and the average loss is the sum of the losses divided by 14. 3. Relative strength, RS, is the average gain divided by the average loss. 4. RSI = 100 - 100 / (1 + RS).

From then on, each new period updates the averages with Wilder's smoothing instead of a fresh 14-period sum:

``` average gain = (previous average gain x 13 + current gain) / 14 average loss = (previous average loss x 13 + current loss) / 14 ```

The scale follows from the formula. If there were no losses in the window, RS is undefined and RSI is set to 100, even when there were no gains either. If there were no gains, RSI is 0. When average gains and average losses are equal, RS is 1 and RSI is exactly 50.

A worked example

Take a hypothetical stock with 15 daily closes, in dollars. The first close only sets the starting point, so 15 closes give the 14 changes the first RSI needs:

The gains add up to 5.20 and the losses to 1.70. Divided by 14, the average gain is 0.3714 and the average loss is 0.1214. RS is 0.3714 / 0.1214, about 3.06, and RSI is 100 - 100 / (1 + 3.06), about 75.4. Over this window the stock rose on nine of 14 days, and its gains were about three times the size of its losses.

On day 16 the stock closes at 52.80, a fall of 0.70. Wilder's smoothing updates the averages: the average gain becomes (0.3714 x 13 + 0) / 14 = 0.3449, and the average loss becomes (0.1214 x 13 + 0.70) / 14 = 0.1628. RS is now about 2.12 and RSI about 67.9. One down day moved the reading from above 70 to below it, because a loss more than five times the current average loss entered the calculation.

Why the smoothing method matters

Wilder's smoothing gives the newest change a weight of 1/14 and carries the rest forward, which is the same as an exponential average with a factor of 1/14. A standard 14-period exponential moving average, the one described in what a moving average is, uses a factor of 2 divided by 15, about 0.133, so it reacts almost twice as fast. Some platforms build RSI with that exponential average, and some with a plain 14-period simple average of gains and losses. All three give lines of similar shape and slightly different values.

There is a second source of disagreement. Because each smoothed value carries forward every value before it, an RSI depends a little on where the calculation started. StockCharts, for example, says it uses at least 250 data points before the first date on a chart when computing RSI, so that the early part of the line has settled. Two platforms that start from different points in history, use different closes (adjusted or unadjusted for splits and dividends), or use a different bar interval can show different readings for the same day.

What the common readings describe

Each widely quoted RSI reading is a description of recent price changes, and each has a limit worth stating.

• Above 70 or below 30. Recent gains, or recent losses, have been much larger than the other side over the look-back. A series that keeps rising with few down days can hold above 70 for a long stretch, and one that keeps falling can stay below 30; StockCharts notes that momentum oscillators can remain overbought or oversold in a strong trend. The lines are conventions, not properties of the market.
• The 50 line. Above 50, average gains over the window exceed average losses; below it, the reverse. That is the whole content of a 50 crossing.
• Divergence. A divergence is when price makes a new high or low and RSI does not, which says that at the newer high or low the balance of average gains to average losses over the window was less one-sided than at the previous one. It describes the size of recent changes and nothing about what follows.

The window length changes all of these. A shorter look-back, such as 7 periods, swings to the extremes more often; a longer one, such as 21 or 28, spends more of its time near 50. The same price history can read as overbought on one setting and neutral on another.

RSI in Kresmion's terminal

Kresmion's terminal charts include RSI as an indicator in its own pane below the price, for any stock, index or crypto pair the charts cover. It uses Wilder's smoothing, seeded with a simple average of the first changes as in the steps above, defaults to 14 periods on closes, and draws reference lines at 30, 50 and 70. The length can be set from 2 to 200 and the source switched from the close to the open, high, low or an average of them. The charts are part of the workspace and open with a free account. They also carry Stochastic RSI and other momentum indicators, and the same candlesticks described in how to read a candlestick chart.

What RSI cannot tell you

RSI is computed only from past closes. It has no input for volume, news, valuation or anything outside the price series, and it carries no forward-looking term. A reading of 75 means recent gains outweighed recent losses by a set margin; it does not mean the price is too high, and a reading of 25 does not mean it is cheap. This page makes no claim about what follows a crossing, and the same reading on a different interval or platform may not be the same number. It is a compact summary of recent price changes, not a forecast.

Key takeaways

Frequently asked questions

What does an RSI of 70 mean?

It means that over the look-back, average gains have been about 2.3 times the size of average losses, since an RS of 2.33 gives an RSI of 70. Wilder called readings above that level overbought. It describes how one-sided recent price changes have been, and a series can stay above 70 for an extended period.

What is the best RSI setting?

There is no setting that is correct in general. Fourteen periods is Wilder's original and the most common default. Shorter settings reach the extremes more often and longer ones stay nearer 50, so the setting changes how often a chart shows readings above 70 or below 30 for the same prices.

Why is my RSI different from another website's?

Usually because of the smoothing method, the starting point of the calculation, adjusted versus unadjusted closes, or a different bar interval. Wilder's smoothing, an exponential average and a simple average all produce slightly different values from the same data.

Does an oversold RSI mean the price will go up?

No. An RSI below 30 means recent losses have been much larger than recent gains over the look-back. It is built only from closes that have already printed, and it carries no information about what the next closes will be.

This page is information, not investment advice.

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Source: J. Welles Wilder Jr., New Concepts in Technical Trading Systems (Trend Research, 1978), https://openlibrary.org/works/OL5039607W ; StockCharts ChartSchool, Relative Strength Index (RSI), https://chartschool.stockcharts.com/table-of-contents/technical-indicators-and-overlays/technical-indicators/relative-strength-index-rsi ; Kresmion terminal chart engine (RSI indicator, Wilder smoothing). All prices in the worked example are invented.

Kresmion Research.