Technical indicator

Relative Strength Index (RSI)

The Relative Strength Index (RSI) measures the internal strength of a security by comparing the size of recent gains with recent losses. It moves between 0 and 100.

Type

Momentum oscillator (0–100)

Typical parameters

n = 14 days (9 for faster signals)

Main signal

Turns up from below 30 (buy) or down from above 70 (sell)

What RSI shows

RSI was introduced by J. Welles Wilder in 1978. Do not confuse it with comparative relative strength, which compares one stock with another; RSI compares a security only with its own past price changes.

• RSI usually tops near 70 and bottoms near 30. Readings above 70 indicate an overbought security, below 30 an oversold one; very high values (above 90–95) often precede a reversal.
• RSI sometimes shows chart formations, such as head-and-shoulders, more clearly than the price chart.
• Support and resistance levels and breakouts often appear on RSI before they appear on the price.
• Divergence between RSI and price – for example, a new price high without a new RSI high – warns of a possible reversal.

Calculation

A gain is the positive change of the closing price from one day to the next, a loss the absolute value of a negative change. Wilder smooths both averages recursively:

and the same for losses. Wilder recommended n = 14; shorter periods such as 9 make the indicator more sensitive.

Trading signals

• Buy when RSI has fallen to a low level (below 30) and turns upward.
• Sell when RSI reaches a high level (above 70) and turns downward.