Relative Strength Index — a momentum oscillator that measures the speed and magnitude of price changes, scaled from 0 to 100, commonly used to identify overbought and oversold conditions.
RSI was developed by J. Welles Wilder and introduced in 1978. It is calculated using the average of up-closes vs. down-closes over a specified period (default 14 periods). Readings above 70 are traditionally considered "overbought" — the asset has risen too far too fast and may be due for a pullback. Readings below 30 are "oversold" — potentially due for a recovery.
The overbought/oversold interpretation is commonly misapplied. In strong trending markets, RSI can remain above 70 for weeks or months without generating a useful sell signal. More experienced traders use RSI for divergence analysis: if price makes a new high but RSI makes a lower high (bearish divergence), it signals that momentum is weakening even as price continues higher — a potential warning of impending reversal. Bullish divergence (lower price low with higher RSI low) works in the opposite direction.
RSI is also used as a trend indicator: in uptrends, RSI tends to range between 40 and 80; pullbacks to the 40–50 zone are often good buying opportunities. In downtrends, RSI tends to range between 20 and 60, with rallies to 50–60 being selling opportunities. This "range shift" behavior provides useful context beyond simple overbought/oversold readings.
This definition is for informational and educational purposes only. Nothing on Finance Compass constitutes financial, investment, or trading advice. Always conduct your own research and consult a qualified professional before making financial decisions.