# RSI (Relative Strength Index) > The RSI measures the speed and size of recent price moves on a 0 to 100 scale. Learn the formula, overbought and oversold levels, divergence and how to trade it. Source: https://learn.tradelabsai.com/indicators/rsi/ Track: Indicators · Level: Beginner · Updated: 2026-10-03 Publisher: TradeLabs AI (https://tradelabsai.com). Education, not financial advice. Cite as: TradeLabs Learn, "RSI (Relative Strength Index)", https://learn.tradelabsai.com/indicators/rsi/ The Relative Strength Index (RSI) is a momentum oscillator that measures how strong recent gains have been compared with recent losses, on a scale from 0 to 100. J. Welles Wilder introduced it in his 1978 book *New Concepts in Technical Trading Systems*, and it has become one of the most widely used indicators in trading. High readings show strong upward momentum; low readings show strong downward momentum. ## How RSI is calculated ``` RS = Average gain ÷ Average loss, over n periods RSI = 100 − 100 ÷ (1 + RS) ``` The standard period is 14. Wilder used a smoothed average, similar to an exponential average, so recent changes carry more weight while older ones fade. **Example: Reading the result** Over the last 14 days, the average daily gain was $0.90 and the average daily loss was $0.45. RS = 2.0. RSI = 100 minus 100 ÷ 3 = 66.7. Gains have been twice as large as losses on average, so momentum is clearly positive but not extreme. ## Overbought and oversold | RSI | Common reading | |---|---| | Above 70 | Overbought: strong upward momentum, price may be stretched | | 50 | Neutral momentum | | Below 30 | Oversold: strong downward momentum, price may be stretched | The crucial point many beginners miss: **overbought does not mean "sell"**. In strong uptrends, RSI can stay above 70 for weeks while price keeps rising. Selling every time RSI crosses 70 means fighting the trend. Overbought and oversold readings are most useful in ranges, where price rotates between extremes. ## RSI in trends Andrew Cardwell and Constance Brown observed that RSI tends to shift ranges with the trend: - In uptrends, RSI often oscillates between about 40 and 80, with 40 to 50 acting as support. - In downtrends, it often oscillates between about 20 and 60, with 50 to 60 acting as resistance. So a pullback in an uptrend where RSI drops to 40 to 45 and turns up can be a better buy signal than waiting for 30. ## Divergence Divergence is when price and RSI disagree: - **Bearish divergence:** price makes a higher high, RSI makes a lower high. Upward momentum is weakening. - **Bullish divergence:** price makes a lower low, RSI makes a higher low. Downward momentum is weakening. Divergence is a warning, not a trigger. Trends can continue with repeated divergences. Combine it with structure, such as a break of the last swing, before acting. See [Change of Character](https://learn.tradelabsai.com/price-action/change-of-character/). ## Trading with RSI 1. **Range trading:** buy near support when RSI is oversold and turning up; sell near resistance when overbought and turning down. 2. **Trend pullbacks:** in an uptrend, buy when RSI pulls back to its trend range support (around 40 to 50) and turns up. 3. **Momentum confirmation:** a breakout with RSI pushing above 60 or 70 shows strong momentum behind it. 4. **Divergence at key levels:** bearish divergence at major resistance, or bullish divergence at major support, adds weight to a reversal setup. ## Settings - **14 periods:** the standard. - **Shorter (2 to 9):** faster, more extreme readings; popular in short term mean reversion strategies. - **Longer (20 to 25):** smoother, fewer signals. - Some traders use 80 and 20 instead of 70 and 30 to filter for more extreme readings. You can add the RSI under the price on the [TradeLabs AI chart](https://tradelabsai.com/chart) and compare its readings with how price behaved at past swing highs and lows. ## Common mistakes - **Shorting every overbought reading** in an uptrend. - **Treating divergence as an entry signal** on its own. - **Ignoring the trend** and the RSI range shift. - **Over tweaking settings** to fit past charts. ## Frequently asked questions ### What does RSI measure? The relative size of recent gains versus losses, showing the strength of momentum on a 0 to 100 scale. ### Is an RSI above 70 a sell signal? Not by itself. It shows strong momentum. In uptrends, RSI can stay above 70 for a long time while prices rise. ### What is the best RSI setting? The default 14 periods works for most traders. Shorter settings suit short term mean reversion; longer ones give smoother readings. ## Sources - Wikipedia, [Relative strength index](https://en.wikipedia.org/wiki/Relative_strength_index) ## Continue learning - Next lesson: [MACD](https://learn.tradelabsai.com/indicators/macd/) - Previous lesson: [Volume-Weighted Moving Average (VWMA)](https://learn.tradelabsai.com/indicators/vwma/) - Related: [Moving Averages Explained](https://learn.tradelabsai.com/indicators/moving-averages-explained/): Moving averages smooth price to show the trend. Learn SMA vs EMA, popular settings like the 20, 50 and 200 day, crossovers, dynamic support and common mistakes. - Related: [MACD](https://learn.tradelabsai.com/indicators/macd/): MACD tracks the gap between two EMAs to show trend and momentum. Learn the MACD line, signal line and histogram, crossovers, divergence and common pitfalls. - Related: [Stochastic Oscillator](https://learn.tradelabsai.com/indicators/stochastic-oscillator/): The stochastic oscillator shows where the close sits within the recent high low range. Learn %K and %D, overbought and oversold levels, crossovers and divergence. - Related: [Volume Divergence](https://learn.tradelabsai.com/volume/volume-divergence/): Volume divergence is when price makes new highs or lows on shrinking volume. Learn how to spot bearish and bullish volume divergence and how to act on it. - Related: [Williams %R](https://learn.tradelabsai.com/indicators/williams-r/): Williams %R shows where the close sits within the recent range on a 0 to minus 100 scale. Learn the formula, overbought and oversold levels and trading uses. - Related: [Mean Reversion](https://learn.tradelabsai.com/strategies/mean-reversion/): Mean reversion trades bet that prices stretched far from their average will come back. Learn the signals, z scores, examples and the risk of fading strong trends. - Related: [Momentum Trading](https://learn.tradelabsai.com/strategies/momentum-trading/): Momentum trading buys assets that are rising fastest and sells those falling fastest. Learn the research, intraday and multi month methods and momentum crashes.