Definition
The relative strength index (RSI) is a momentum indicator that scores recent price gains against recent losses on a scale from 0 to 100, usually over 14 periods.
How it works
The formula is RSI = 100 − 100 ÷ (1 + RS), where RS = average gain ÷ average loss over the chosen number of periods. Gains are the rises in closing price on up periods and losses are the falls on down periods, each averaged over all periods in the window. The first value uses simple averages; later values are usually smoothed by blending each new gain or loss with the previous average. Charting tools may use slightly different smoothing methods, so readings can vary a little.
When gains dominate, RS is large and the RSI moves toward 100. When losses dominate, it moves toward 0. A common convention treats readings above 70 as overbought and below 30 as oversold, meaning the price has moved up or down quickly relative to its recent history. Traders also watch for divergence, when the price makes a new high or low but the RSI does not.
Overbought does not mean the price must fall, and oversold does not mean it must rise. In a strong trend, the RSI can stay above 70 or below 30 for a long time. The 14-period setting and the 70 and 30 lines are conventions, not rules.
Example (hypothetical numbers)
Suppose that over 14 days Coin A's price rose on 9 days by a total of $16.80 and fell on 5 days by a total of $5.60.
Average gain = $16.80 ÷ 14 = $1.20 and average loss = $5.60 ÷ 14 = $0.40, so RS = $1.20 ÷ $0.40 = 3.
RSI = 100 − 100 ÷ (1 + 3) = 100 − 25 = 75.
The reading is above the common 70 line, which shows strong recent gains, not a guarantee that the price will turn down.
Common mistakes
- Treating a reading above 70 as an automatic sign that the price will fall.
- Ignoring the trend, even though the RSI can stay overbought for a long time in a strong uptrend.
- Comparing RSI values calculated with different period lengths or smoothing methods.
This glossary is for education only and is not investment advice. Examples use hypothetical numbers.