The RSI, published by J. Welles Wilder in New Concepts in Technical Trading Systems (1978), is the most widely used momentum oscillator in the world. It measures one precise thing: how one-sided the recent push has been — the average size of up-bars against the average size of down-bars, compressed into a 0–100 scale. It does not predict price: it measures what is already happening.
In plain terms — If the moving average tells you where the car's nose is pointing, the RSI tells you how hard the accelerator is pressed. A car can point north while accelerating, coasting, or with a foot already on the brake: on the chart those three situations look alike — on the rev counter they don't.
How it is built
Over the last 14 bars, up-closes and down-closes are separated and their average pushes measured (with Wilder's smoothing, which keeps the line stable):
RS = average gain / average loss → RSI = 100 − 100/(1 + RS)
| Reading | Meaning |
|---|---|
| RSI ≈ 50 | The two pushes balance out |
| RSI > 70 | Recent gains have dominated — unusually strong push |
| RSI < 30 | Recent losses have dominated |
Note what the table does not say: it does not say "sell". Above 70 the push has been unusually intense — what to do with that depends on the market regime.
How to read the chart — Top: price — a flat phase, a correction, then a strong trend. Bottom: RSI 14 (gold) with the 70/30 thresholds and the 50 midline; the highlighted band marks the time spent above 70. Interactive — the points show persistent overbought, the final divergence and the role of the 50 line.
Reading it in practice
- First question: what market is this? In a range, excess push tends to revert and the touches of 70/30 often coincide with the edges of the oscillation — the RSI's natural habitat. In a strong trend the same threshold changes meaning: the RSI glues itself above 70, and selling the first touch means exiting at the start of the best move on the chart.
- Range shift — in bull markets the RSI tends to swing between 40 and 80 (with 40 acting as the floor on corrections); in bear markets between 20 and 60. Simply noticing which band the RSI lives in is a regime clue hidden in plain sight.
- Divergences — price at a new high, RSI at a lower high: the record was set with less push. Two adult-grade cautions: in powerful trends divergences pile up for a long time before anything happens; and a divergence is for stopping the chase, not for fading the move — confirmation belongs to price, with the break of a structure.
- The 50 line — the watershed between buying and selling dominance; its role as the oscillator's support/resistance is often more informative than the extreme thresholds.
Limits and traps
Warning — "Sell above 70, buy below 30" applied mechanically is one of the fastest ways to lose in a trend. The threshold measures the intensity of the push: in a trend, a strong push is the fuel of the move, not its illness.
- Period 14 and thresholds 70/30 are Wilder's convention: first learn to read the standard instrument; tune it much, much later.
- The RSI compresses everything into 0–100: huge moves and modest ones can produce similar readings; true amplitude lives on price (or on the ATR).
Links
- stochastic — the other oscillator: where price closes within the recent range
- macd — momentum without a fixed scale, with zero as the boundary
- cci — deviation from the typical price
- trend · price-range · indicatori