RSI Explained: Formula, Levels, and Signals

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Developed by J. Welles Wilder Jr. in 1978, it is used to study whether an asset may be overbought (above 70) or oversold (below 30), and to spot shifts in momentum.

What is the RSI indicator?

RSI is a momentum oscillator introduced by J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems. It belongs to the same family of momentum tools as other indicators we cover on the Bullynx blog, and it remains one of the most widely referenced momentum gauges in technical analysis.

The indicator answers a simple question: how strong has recent price movement been relative to itself? It compares the average size of recent gains to the average size of recent losses, then converts that ratio into a single number between 0 and 100. A high reading means up-days have dominated recently, while a low reading means down-days have dominated. Because it oscillates within fixed bounds, RSI is easy to read across very different assets and timeframes.

How is RSI calculated? (the formula)

RSI uses a two-step calculation built around average gains and average losses over a lookback period (Wilder's default is 14 periods).

The main equation is:

RSI = 100 - [ 100 / (1 + RS) ]

RS = Average Gain / Average Loss

Step 1, the first average over the past 14 periods:

First Average Gain = (Sum of Gains over 14 periods) / 14
First Average Loss = (Sum of Losses over 14 periods) / 14

Step 2, Wilder's smoothing for every period after that:

Average Gain = [ (previous Average Gain x 13) + current Gain ] / 14
Average Loss = [ (previous Average Loss x 13) + current Loss ] / 14

Gains and losses are based on close-to-close changes and are always entered as positive numbers. If today closes higher, that day's change counts as a gain; if it closes lower, the absolute drop counts as a loss. If the close is unchanged, the day adds neither a gain nor a loss. The smoothing step (a Wilder smoothed moving average, not a simple average) is why RSI values stabilize over time. Roughly 250 data points are recommended for a reading that matches other charting platforms.

What do overbought and oversold mean?

Wilder's original thresholds set overbought at RSI above 70 and oversold at RSI below 30. The midpoint, 50, acts as a centerline: readings above 50 generally reflect net upward momentum, and readings below 50 reflect net downward momentum.

The key nuance is context. Overbought and oversold readings are most informative when price is moving sideways in a range, because the boundaries tend to mark the upper and lower edges of that range. In strong trends, the same readings are far less reliable, since momentum can stay elevated for long stretches. Always treat 70 and 30 as zones that warrant attention rather than as mechanical instructions.

What is RSI divergence?

Divergence occurs when price and RSI move in opposite directions, which can hint at a weakening trend and a potential reversal. There are two classic forms.

• Bullish divergence: price makes a lower low, but RSI makes a higher low. This suggests selling momentum is fading and is most meaningful when it appears in oversold territory.
• Bearish divergence: price makes a higher high, but RSI makes a lower high. This suggests buying momentum is fading and is most meaningful in overbought territory.

Divergence is more dependable on higher timeframes and should be confirmed with other tools such as volume, a break of support or resistance, or candlestick patterns. A major caution: in a strong trend, divergence can persist for a long time, with price continuing to print new highs against several lower RSI highs before any reversal occurs (or without one at all). Divergence alone is not a setup.

Failure swings and reversals (advanced)

Wilder also described failure swings, a reversal pattern that does not require divergence. A bullish failure swing happens when RSI drops below 30, bounces above it, pulls back but holds above 30, then breaks its prior RSI peak; the bearish version mirrors this around the 70 level. Later, analyst Andrew Cardwell refined the framework with positive and negative reversals: a positive reversal pairs a higher price low with a lower RSI low (read as bullish within uptrends), and a negative reversal pairs a lower price high with a higher RSI high (read as bearish within downtrends).

What RSI settings and timeframes work best?

The standard setting is 14 periods, and it applies to any timeframe, whether daily, hourly, or intraday. Adjusting the lookback changes the indicator's character.

Shorter periods generate more signals at the cost of more false ones; longer periods smooth the line and reduce signal count while improving reliability. With faster settings, traders sometimes widen the bands to 20/80 to filter noise. Another practical adjustment is shifting the thresholds for the trend regime: in strong uptrends, some analysts use bands closer to 40 and 80, while in downtrends they shift toward 20 and 60. This counters RSI's tendency to stay pinned at one extreme during persistent trends.

Common RSI mistakes and limitations

RSI is powerful but easy to misuse. The most frequent errors come from treating it as a standalone, mechanical system.

1. Reading 70/30 as automatic triggers. This is the single most common mistake and a recipe for premature exits and false signals.
2. Fighting strong trends. RSI can stay above 70 throughout a strong uptrend and below 30 throughout a strong downtrend. Per the CMT Association, in uptrends RSI highs often reach roughly 80 to 90 with lows near 40 to 50, while in downtrends highs cap around 55 to 65 with lows near 20 to 30, so fixed 70/30 bands misread trending markets.
3. Whipsaws. RSI is more reliable in ranging markets than in trending ones, where false signals multiply.
4. Lag. Because RSI is derived from past closing prices, its signals can arrive late in fast-moving markets.
5. Persistent divergence. As noted above, divergence can run against price for a long time before resolving, if it resolves at all.
6. Using it alone. RSI works best alongside trend analysis, volume, chart patterns, and support and resistance.

Putting RSI in context

Think of RSI as one lens, not the whole picture. It tells you how stretched momentum has become and where it may be losing steam, but it cannot tell you on its own whether a move will reverse or simply pause. The strongest reads come from combining a momentum signal with the broader trend, the location of key price levels, and confirmation from volume or price patterns. Used that way, RSI becomes a disciplined way to ask better questions about a chart rather than a shortcut to answers.