Relative Strength Index (RSI) Indicator

What is the Relative Strength Index (RSI) Indicator?

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes to evaluate overbought or oversold conditions in the price of an asset.
The RSI oscillates between 0 and 100.

  • Traditionally, RSI is considered:
    • Overbought when above 70
    • Oversold when below 30
  • Traders may also use adjusted thresholds (e.g., 80/20) depending on the asset and timeframe.
  • RSI is used to:
    • Identify potential trend reversals
    • Confirm trend strength
    • Spot divergences between price and momentum

RSI Example

How the RSI Indicator Works

  • Overbought/Oversold Levels:
    RSI is considered overbought when above 70 and oversold when below 30.
    These levels can be customised. For an asset frequently hitting 70, consider raising the overbought threshold to 80 (and vice-versa for oversold).

    Note: During strong trends, RSI can remain overbought or oversold for extended periods.

  • RSI Chart Patterns:
    RSI can form chart patterns such as:

    • Double tops/bottoms
    • Trendlines
    • Support/Resistance zones not always visible on price charts.

  • Trend Ranges:

    • In an uptrend, RSI often stays between 40–90, with 40–50 acting as support.
    • In a downtrend, RSI often stays between 10–60, with 50–60 acting as resistance.
      (These ranges can vary based on settings and the asset’s volatility.)

  • Divergences:
    If price makes a new high or low unconfirmed by RSI, this divergence can signal a reversal.

    • Top Swing Failure: RSI forms a lower high, then moves below a prior low.
    • Bottom Swing Failure: RSI forms a higher low, then moves above a prior high.

RSI Calculation Formula

While there are multiple computational approaches (smoothed or exponential forms), the classic formula is: