Oscillators
RSI: Relative Strength Index
RSI is a score from 0 to 100 that compares the size of recent gains with recent losses. Above 70 is often called overbought, below 30 oversold.
The idea in plain words
If most of the recent candles closed higher and by large amounts, buyers have been very strong, and RSI is high. RSI does not say the price must fall; it says the rise has been unusually one-sided.
How it is calculated
Over the last 14 candles, average the gains (on up candles) and the losses (on down candles) using Wilder's smoothing. Their ratio is turned into a 0–100 scale.
Average gain and average loss over 14 candles (Wilder smoothing)
RS = average gain ÷ average loss
RSI = 100 − 100 ÷ (1 + RS)How to use it
- Above 70: strong, possibly overextended. Below 30: weak, possibly oversold. In strong trends, use 80/20 instead.
- Divergence: price makes a new high, RSI does not: the rise is losing strength.
- The 50 line: RSI above 50 in an uptrend, below 50 in a downtrend.
Drawing conclusions
- RSI can stay above 70 for a long time in a strong uptrend: treat it as strength until it turns down.
- A drop back below 70 (or a rise back above 30) is a better signal than the first touch.
Example
Average gain over 14 days 0.40, average loss 0.20: RS = 2, RSI = 100 − 100 ÷ 3 = 66.7. Gold reaches RSI 78 after a two-week rally; it pauses for a week while RSI cools to 55, then resumes the rise.
Prices in examples are illustrative.
Watch out for
- "Overbought" is not a sell signal on its own.
- Shorter periods (for example 7) are faster but noisier.
A little history
J. Welles Wilder Jr., 1978, "New Concepts in Technical Trading Systems". It is probably the most widely used oscillator today.
Educational content only. No indicator or pattern predicts the future, and nothing here is investment advice.