What Is the Relative Strength Index (RSI)?
The Relative Strength Index, or RSI, is a technical indicator used to analyse the momentum of the price of a security. It’s displayed on a scale of 0 to 100 and is one of the most widely used momentum tools across all types of markets, from forex and shares to commodities and indices.
How RSI Is Calculated
RSI compares the average size of recent gains to the average size of recent losses over a set period, commonly 14 sessions, then converts that comparison into a single reading. The exact formula is less important for most traders than understanding what the resulting number represents, and most charting platforms calculate it automatically.
RSI is calculated using:
where RS = (Average Up Moves over N periods) / (Average Down Moves over N periods), typically using a 14-period lookback. The RSI ranges from 0–100, with >70 considered overbought and \<30 oversold.
Reading Overbought and Oversold Levels
An RSI reading above 70 is traditionally seen as a sign a security may be overbought, while a reading below 30 suggests it may be oversold. These thresholds are a guide rather than a precise trigger, and some traders adjust them depending on the asset or timeframe, using tighter or wider bands depending on typical volatility.
How Traders Use RSI Alongside Other Tools
RSI is rarely used on its own. Many traders pair it with trend lines, support and resistance levels, or other indicators to confirm a signal before acting on it, since momentum readings can stay at extreme levels for longer than expected during strong trends, a pattern often referred to as divergence when price and RSI move in opposite directions.
RSI Can Give False Signals: What to Keep in Mind
As a precaution, an overbought or oversold reading doesn’t guarantee an imminent reversal, particularly in a strongly trending market where RSI can remain elevated for an extended period. Treating RSI signals as certainties rather than probabilities is a common pitfall, especially for those new to technical analysis.
Using RSI as One Piece of the Puzzle
RSI offers a useful read on momentum, but it works best as part of a wider analysis rather than a standalone decision-making tool. Combining it with other indicators and sound risk management tends to produce a more balanced approach.
⚠ Risk Warning: CFDs are complex financial instruments and come with a high risk of losing money rapidly due to leverage. Ensure you fully understand how CFDs work and whether you can afford to take the high risk of losing your money.
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