The Relative Strength Index (RSI) is probably the best-known technical indicator in the world. It appears on every charting platform and in almost every introduction to technical analysis. It is also one of the most misused. This guide explains what it actually measures, how to read it and where it stops being useful.
What RSI measures
RSI compares the size of recent up-days with the size of recent down-days. It does not look at fundamentals, news or volume: only at closing prices.
It was introduced by J. Welles Wilder in 1978 and is calculated in two steps:
- Over the last N sessions (14 is the classic choice), take the average gain of the days that closed up and the average loss of the days that closed down.
- Divide one by the other (RS = average gain / average loss) and turn the result into a number between 0 and 100:
RSI = 100 − 100 / (1 + RS)
If almost every recent day was an up-day, RSI approaches 100. If almost every day was a down-day, it approaches 0. A value of 50 means gains and losses have been about the same size.
What 70 and 30 really mean
The classic reading says:
- Above 70: the stock is "overbought"
- Below 30: the stock is "oversold"
The words suggest the price must turn. It does not have to. An RSI above 70 only says that recent gains have been much larger than recent losses. In a strong uptrend that can last for weeks, and selling every time RSI crosses 70 means selling the best stocks of the year again and again.
A more useful way to read the levels:
Context decides. An oversold reading in a stock that is in a long-term uptrend is a very different thing from the same reading in a stock that has been falling for a year.
- 1RSI stays above 70 for weeks and the rise goes on: overbought does not mean it will fall.
- 2After seven sessions of heavy selling RSI drops below 30: the fall was strong, which is not a promise of a bounce.
Short RSI and long RSI
The number of sessions changes the indicator's personality:
- RSI(14) moves slowly. It describes the tone of the last few weeks and rarely reaches the extremes.
- RSI(2) looks only at the last two sessions. It jumps from one extreme to the other and reaches readings below 10 or above 90 often.
That is not a defect. A very short RSI is a way to detect sharp, sudden moves: two heavy down-days in a row push RSI(2) close to zero, even in an excellent company.
- 1Two down-days in a row take RSI(2) close to zero; RSI(14) barely moves.
- 2The same a few weeks later: RSI(2) picks up sharp drops of a few days.
How we use RSI at InbestPlanners
RSI appears in three places, always as part of a fixed rule, never as a stand-alone verdict.
1. To open a Bounce signal. A Bounce signal looks for a stock in a long-term uptrend (its close above its 200-session average) that has just fallen hard. "Fallen hard" is measured with RSI(2): it has to drop below a threshold that adapts to the stock's own volatility, stricter for nervous stocks and more permissive for calm ones. And no signal is produced if the last two sessions had very heavy volume, a sign of sustained selling rather than a passing dip.
2. To close a Bounce position. When RSI(2) rises above 80 while the position is in profit, the rebound has done its job and the position is closed, even if the +3% target has not been reached.
3. As context in the analysis. The 360 Analysis and the screener show the classic RSI(14) as one of several indicators that describe a stock's momentum. It is one piece of information among many, not a signal on its own.
The full list of entry and exit rules is published on the methodology page.
Four common mistakes
1. Treating 70 as a sell order. In a strong trend RSI can stay above 70 for a long time. Overbought is a description, not a forecast.
2. Buying every reading below 30. A company in trouble can stay oversold while it keeps falling. Without a filter for the long-term trend, "cheap" can become cheaper.
3. Using it alone. RSI says nothing about earnings, debt or valuation. Combine it with the trend (for example, the 200-session average) and with what you know about the business.
4. Tuning it until it fits the past. Any indicator can be made to look perfect on a historical chart by adjusting its period and its levels. A rule chosen that way usually works much worse on the next stock or the next year. That is why our rules are fixed in advance and applied in the same way to every stock.
In short
- RSI compares the size of recent gains and losses on a scale from 0 to 100.
- 70 and 30 describe the strength of a move; they do not predict a turn.
- A short RSI, like RSI(2), detects sudden drops; a long one, like RSI(14), describes the tone of recent weeks.
- It works best inside a rule that also looks at the long-term trend.
This content is for educational purposes only and does not constitute financial advice. Past performance does not guarantee future results.