What Is RSI｜Meaning, Reading and Formula for Beginners
RSI is an oscillator showing overbought and oversold conditions on a 0–100 scale. This beginner's guide covers its meaning, calculation, 30/70 and divergence.
What is RSI?｜An indicator of overbought and oversold conditions
RSI (Relative Strength Index) is an oscillator that compares the size of price gains and losses over a set period and expresses, on a scale of 0 to 100, whether the market is overbought or oversold. It was developed by J. Welles Wilder, and a 14-period setting is widely used. The stronger the upward momentum, the closer it moves to 100; the stronger the downward momentum, the closer it moves to 0.
How RSI is calculated (just the idea)
RSI is calculated from the ratio between the size of up moves and down moves over the most recent N bars (14 by default). You don't need to memorize the formula. It is enough to understand it as "a single line from 0 to 100 that sums up whether upward or downward momentum has dominated over a set period."
How to read RSI｜30, 70, 50 and divergence
| Level | General interpretation | Caveat |
|---|---|---|
| 30 or below | Oversold | In a strong downtrend, RSI can stay at 30 or below |
| 70 or above | Overbought | In a strong uptrend, RSI can stay at 70 or above |
| 50 | Reference level for assessing whether upward or downward momentum dominates (above 50: upward momentum dominates) | Frequently crossed back and forth in a range-bound market |
| Divergence | A possible sign of a reversal (price and RSI moving in opposite directions) | A reversal doesn't always follow |
Divergence is a mismatch between the direction of price and RSI, such as price making lower lows while RSI makes higher lows, and it is often described as a sign of a possible trend reversal. These are only general guidelines; none is a guaranteed buy or sell signal.
The limits of RSI｜It is not a cure-all
RSI works less well in strongly trending markets. "Oversold" does not mean "about to bounce"; RSI can stay at 30 or below while price keeps falling. Which conditions make RSI work less well is covered in When RSI Works Less Well.
Putting RSI into practice
Once you understand how to read RSI, the next questions are how to use it in trading and whether it actually works. For guidance on planning trades, see How to Trade RSI Reversals; for testing whether it works, see How to Backtest RSI. In ENTRIQ's Chart Replay, you can display RSI on historical charts and check it for yourself.
Frequently asked questions (FAQ)
Q. What does RSI measure? A. It expresses the ratio of upward to downward momentum over a set period on a 0–100 scale, measuring how overbought or oversold the market is. Q. Do I need to memorize the RSI formula? A. No. Most tools calculate and display RSI automatically. It is enough to know that RSI is high when upward momentum dominates and low when downward momentum dominates. Q. Will price bounce when RSI drops below 30? A. It is a rule of thumb for a possible bounce, but it isn't guaranteed. In a strong downtrend, RSI can stay at 30 or below. Q. What is divergence? A. It is when the directions of price and RSI diverge, and it is regarded as a sign of a possible trend reversal. However, a reversal doesn't always follow.
What this article covered
- RSI expresses the ratio of upward to downward momentum over a set period on a 0–100 scale.
- 30 or below = oversold, 70 or above = overbought, 50 = which side's momentum dominates, divergence = a sign of a possible reversal (all rules of thumb).
- In a strong trend, RSI can stay pinned at extreme levels; it is not a guaranteed buy or sell signal.
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This article is for informational purposes only and does not recommend any specific trade. All investment decisions are your own responsibility.
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