RSI (Relative Strength Index)
Momentum on a 0–100 dial: how one-sided the recent tape has been, and when it's stretched.
Core IndicatorsIntermediate 6 min read· Lesson 7 of 13 in Technical Analysis
Explanation & formula
RSI(14) = 100 − 100/(1+RS), where RS = average gain / average loss over 14 periods (Wilder smoothing). All gains → 100; all losses → 0; balance → 50.
Interpretation
Classic bands: >70 overbought, <30 oversold — but 'overbought' means STRETCHED, not 'must fall.' In strong uptrends RSI camps at 60–80 and oversold rarely appears; in downtrends the reverse. The 50 line doubles as a trend gauge.
Bullish / bearish signals
Bullish: RSI <30 in an established UPTREND (the dip-buy combo — see the strategy preset); bullish divergence (price lower low, RSI higher low) showing downside momentum fading. Bearish: the mirrors. Divergences warn; they don't time.
Common mistakes
Shorting a strong trend purely on RSI>70 — trends stay overbought far longer than counter-trend accounts stay solvent. RSI works best as a FILTER combined with trend context, exactly what RSI14 < 30 AND EMA50 > EMA200 encodes.