Relative Strength Index (RSI) Definition - Investopedia

The Relative Strength Index (RSI) is a momentum indicator that measures the magnitude of recent price changes to analyze overbought or oversold conditions. 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InterpretationofRSIItsRanges ExampleofRSIDivergences ExampleofRSISwingRejections RSIvs.MACD LimitationsoftheRSI RelativeStrengthIndexFAQs WhatIstheRelativeStrengthIndex(RSI)? Therelativestrengthindex(RSI)isamomentumindicatorusedintechnicalanalysisthatmeasuresthemagnitudeofrecentpricechangestoevaluateoverboughtoroversoldconditionsinthepriceofastockorotherasset.TheRSIisdisplayedasanoscillator(alinegraphthatmovesbetweentwoextremes)andcanhaveareadingfrom0to100.TheindicatorwasoriginallydevelopedbyJ.WellesWilderJr.andintroducedinhisseminal1978book,“NewConceptsinTechnicalTradingSystems.” TraditionalinterpretationandusageoftheRSIarethatvaluesof70oraboveindicatethatasecurityisbecomingoverboughtorovervaluedandmaybeprimedforatrendreversalorcorrectivepullbackinprice.AnRSIreadingof30orbelowindicatesanoversoldorundervaluedcondition. KeyTakeaways Therelativestrengthindex(RSI)isapopularmomentumoscillatordevelopedin1978.TheRSIprovidestechnicaltraderswithsignalsaboutbullishandbearishpricemomentum,anditisoftenplottedbeneaththegraphofanasset’sprice.AnassetisusuallyconsideredoverboughtwhentheRSIisabove70%andoversoldwhenitisbelow30%. 1:29 RelativeStrengthIndex(RSI) TheFormulafortheRSI TheRSIiscomputedwithatwo-partcalculationthatstartswiththefollowingformula: R S I step one = 100 − [ 100 1 + Average gain Average loss ] RSI_{\text{stepone}}=100-\left[\frac{100}{1+\frac{\text{Averagegain}}{\text{Averageloss}}}\right] RSIstep one​=100−[1+Average lossAverage gain​100​] Theaveragegainorlossusedinthecalculationistheaveragepercentagegainorlossduringalook-backperiod.Theformulausesapositivevaluefortheaverageloss.Periodswithpricelossesarecountedas0inthecalculationsofaveragegain,andperiodswhenthepriceincreasesarecountedas0forthecalculationofaveragelosses.Thestandardistouse14periodstocalculatetheinitialRSIvalue.Forexample,imaginethemarketclosedhighersevenoutofthepast14dayswithanaveragegainof1%.Theremainingsevendaysallclosedlowerwithanaveragelossof−0.8%. ThecalculationforthefirstpartoftheRSIwouldlooklikethefollowingexpandedcalculation: 55.55 = 100 − [ 100 1 + ( 1 % 14 ) ( 0.8 % 14 ) ] 55.55=100-\left[\frac{100}{1+\frac{\left(\frac{1\%}{14}\right)}{\left(\frac{0.8\%}{14}\right)}}\right] 55.55=100−⎣⎢⎢⎡​1+(140.8%​)(141%​)​100​⎦⎥⎥⎤​ Oncethereare14periodsofdataavailable,thesecondpartoftheRSIformulacanbecalculated.Thesecondstepofthecalculationsmoothstheresults. R S I step two = 100 − [ 100 1 + ( Previous Average Gain × 13 )   +  Current Gain ( ( Previous Average Loss × 13 )   +  Current Loss ) ] RSI_{\text{steptwo}}=100-\left[\frac{100}{1+\frac{\left(\text{PreviousAverageGain}\times13\right)\+\\text{CurrentGain}}{\left(\left(\text{PreviousAverageLoss}\times13\right)\+\\text{CurrentLoss}\right)}}\right] RSIstep two​=100−[1+((Previous Average Loss×13) + Current Loss)(Previous Average Gain×13) + Current Gain​100​] CalculationoftheRSI Usingtheformulasabove,theRSIcanbecalculated,wheretheRSIlinecanthenbeplottedbeneathanasset’spricechart. TheRSIwillriseasthenumberandsizeofpositiveclosesincrease,anditwillfallasthenumberandsizeoflossesincrease.Thesecondpartofthecalculationsmoothstheresult,sotheRSIwillonlynear100or0inastronglytrendingmarket. ImagebySabrinaJiang©Investopedia 2021 Asyoucanseeintheabovechart,theRSIindicatorcanstayintheoverboughtregionforextendedperiodswhilethestockisinanuptrend.Theindicatormayalsoremaininoversoldterritoryforalongtimewhenthestockisinadowntrend.Thiscanbeconfusingfornewanalysts,butlearningtousetheindicatorwithinthecontextoftheprevailingtrendwillclarifytheseissues. WhatDoestheRSITellYou? Theprimarytrendofthestockorasset isanimportanttoolinmakingsuretheindicator’sreadingsareproperlyunderstood.Forexample,well-knownmarkettechnicianConstanceBrown,CMT,haspromotedtheideathatanoversoldreadingontheRSIinanuptrendislikelymuchhigherthan30%andthatanoverboughtreadingontheRSIduringadowntrendismuchlowerthanthe70%level. Asyoucanseeinthefollowingchart,duringadowntrend,theRSIwouldpeaknearthe50%levelratherthan70%,whichcouldbeusedbyinvestorstomorereliablysignalbearishconditions.Manyinvestorswillapplyahorizontaltrendlinebetween30%and70%levelswhenastrongtrendisinplacetobetteridentifyextremes.Modifyingoverboughtoroversoldlevelswhenthepriceofastockorassetisinalong-termhorizontalchannelisusuallyunnecessary. Arelatedconcepttousingoverboughtoroversoldlevelsappropriatetothetrendistofocusontradesignalsandtechniquesthatconformtothetrend.Inotherwords,usingbullishsignalswhenthepriceisinabullishtrendandbearishsignalswhenastockisinabearishtrendwillhelptoavoidthemanyfalsealarmsthattheRSIcangenerate. ImagebySabrinaJiang©Investopedia 2021 InterpretationofRSIandRSIRanges Generally,whentheRSIsurpassesthehorizontal30referencelevel,itisabullishsign,andwhenitslidesbelowthehorizontal70referencelevel,itisabearishsign.Putanotherway,onecaninterpretthatRSIvaluesof70oraboveindicateasecurityisbecomingoverboughtor overvalued andmaybeprimedforatrend reversal orcorrectiveprice pullback.AnRSIreadingof30orbelowindicatesanoversoldorundervaluedcondition. Duringtrends,theRSIreadingsmayfallintoabandorrange.Duringanuptrend,theRSItendstostayabove30andshouldfrequentlyhit70.Duringadowntrend,itisraretoseetheRSIexceed70,andtheindicatorfrequentlyhits30orbelow.Theseguidelinescanhelpdeterminetrendstrengthandspotpotentialreversals.Forexample,iftheRSIcan’treach70onanumberofconsecutivepriceswingsduringanuptrend,butthendropsbelow30,thetrendhasweakenedandcouldbereversinglower.  Theoppositeistrueforadowntrend.Ifthedowntrendisunabletoreach30orbelowandthenralliesabove70,thatdowntrendhasweakenedandcouldbereversingtotheupside.TrendlinesandmovingaveragesarehelpfultoolstoincludewhenusingtheRSIinthisway. ExampleofRSIDivergences AbullishdivergenceoccurswhentheRSIcreatesanoversoldreadingfollowedbyahigherlowthatmatchescorrespondinglylowerlowsintheprice.Thisindicatesrisingbullishmomentum,andabreakaboveoversoldterritorycouldbeusedtotriggeranewlongposition. AbearishdivergenceoccurswhentheRSIcreatesanoverboughtreadingfollowedbyalowerhighthatmatchescorrespondinghigherhighsontheprice. Asyoucanseeinthefollowingchart,abullishdivergencewasidentifiedwhentheRSIformedhigherlowsasthepriceformedlowerlows.Thiswasavalidsignal,butdivergencescanberarewhenastockisinastablelong-termtrend.Usingflexibleoversoldoroverboughtreadingswillhelpidentifymorepotentialsignals. ImagebySabrinaJiang©Investopedia 2021 ExampleofRSISwingRejections AnothertradingtechniqueexaminestheRSI’sbehaviorwhenitisreemergingfromoverboughtoroversoldterritory.Thissignaliscalledabullish“swingrejection”andhasfourparts: TheRSIfallsintooversoldterritory.TheRSIcrossesbackabove30%.TheRSIformsanotherdipwithoutcrossingbackintooversoldterritory.TheRSIthenbreaksitsmostrecenthigh. Asyoucanseeinthefollowingchart,theRSIindicatorwasoversold,brokeupthrough30%,andformedtherejectionlowthattriggeredthesignalwhenitbouncedhigher.UsingtheRSIinthiswayisverysimilartodrawingtrendlinesonapricechart. ImagebySabrinaJiang©Investopedia 2021 Likedivergences,thereisabearishversionoftheswingrejectionsignalthatlookslikeamirrorimageofthebullishversion.Abearishswingrejectionalsohasfourparts: TheRSIrisesintooverboughtterritory.TheRSIcrossesbackbelow70%.TheRSIformsanotherhighwithoutcrossingbackintooverboughtterritory.TheRSIthenbreaksitsmostrecentlow. Thefollowingchartillustratesthebearishswingrejectionsignal.Aswithmosttradingtechniques,thissignalwillbemostreliablewhenitconformstotheprevailinglong-termtrend.Bearishsignalsduringdownwardtrendsarelesslikelytogeneratefalsealarms. ImagebySabrinaJiang©Investopedia 2021 TheDifferenceBetweenRSIandMACD Themovingaverageconvergencedivergence(MACD)isanother trend-followingmomentum indicatorthatshowstherelationshipbetweentwo movingaverages ofasecurity’sprice.TheMACDiscalculatedbysubtractingthe26-period exponentialmovingaverage (EMA)fromthe12-periodEMA.TheresultofthatcalculationistheMACDline. Anine-dayEMAoftheMACD,calledthe“signalline,”isthenplottedontopoftheMACDline,whichcanfunctionasatriggerforbuyandsellsignals.TradersmaybuythesecuritywhentheMACDcrossesaboveitssignallineandsell,orshort,thesecuritywhentheMACDcrossesbelowthesignalline. TheRSIwasdesignedtoindicatewhetherasecurityisoverboughtoroversoldinrelationtorecentpricelevels.TheRSIiscalculatedusingaveragepricegainsandlossesoveragivenperiodoftime.Thedefaulttimeperiodis14periods,withvaluesboundedfrom0to100. TheMACDmeasurestherelationshipbetweentwoEMAs,whiletheRSImeasurespricechangeinrelationtorecentpricehighsandlows.Thesetwoindicatorsareoftenusedtogethertoprovide analysts withamorecompletetechnicalpictureofamarket. Theseindicatorsbothmeasurethemomentumofanasset.However,theymeasuredifferentfactors,sotheysometimesgivecontradictoryindications.Forexample,theRSImayshowareadingabove70forasustainedperiodoftime,indicatingthesecurityis overextended tothebuyside. Atthesametime,theMACDcouldindicatethatbuyingmomentumisstillincreasingforthesecurity.Eitherindicatormaysignalanupcomingtrendchangebyshowingdivergencefromprice(thepricecontinueshigherwhiletheindicatorturnslower,orviceversa). LimitationsoftheRSI TheRSIcomparesbullishandbearishpricemomentumanddisplaystheresultsinanoscillatorthatcanbeplacedbeneathapricechart.Likemosttechnicalindicators,itssignalsaremostreliablewhentheyconformtothelong-termtrend. Truereversalsignalsarerareandcanbedifficulttoseparatefromfalsealarms.Afalsepositive,forexample,wouldbeabullishcrossoverfollowedbyasuddendeclineinastock.Afalsenegativewouldbeasituationwherethereisabearishcrossover,yetthestocksuddenlyacceleratedupward. Sincetheindicatordisplaysmomentum,itcanstayoverboughtoroversoldforalongtimewhenanassethassignificantmomentumineitherdirection.Therefore,theRSIismostusefulinanoscillatingmarketwheretheassetpriceisalternatingbetweenbullishandbearishmovements. WhatDoestheRelativeStrengthIndex(RSI)Measure? TheRelativeStrengthIndex(RSI)isameasurementusedbytraderstoassessthepricemomentumofastockorothersecurity.ThebasicideabehindtheRSIistomeasurehowquicklytradersarebiddingthepriceofthesecurityupordown.TheRSIplotsthisresultonascaleof0to100.Readingsbelow30generallyindicatethatthestockisoversold,whilereadingsabove70indicatethatitisoverbought.TraderswilloftenplacethisRSIchartbelowthepricechartforthesecurity,sotheycancompareitsrecentmomentumagainstitsmarketprice. WhatIsanRSIBuySignal? Sometraderswillconsiderita“buysignal”ifasecurity’sRSIreadingmovesbelow30,basedontheideathatthesecurityhasbeenoversoldandisthereforepoisedforarebound.However,thereliabilityofthissignalwilldependinpartontheoverallcontext.Ifthesecurityiscaughtinasignificantdowntrend,thenitmightcontinuetradingatanoversoldlevelforquitesometime.Tradersinthatsituationmightdelaybuyinguntiltheyseeotherconfirmatorysignals. WhatIstheDifferenceBetweentheRSIandMovingAverageConvergenceDivergence(MACD)? RSIandmovingaverageconvergencedivergence(MACD)arebothmeasurementsthatseektohelptradersunderstandasecurity’srecenttradingactivity,buttheyaccomplishthisgoalindifferentways.Inessence,theMACDworksbysmoothingoutthesecurity’srecentpricemovementsandcomparingthatmedium-termtrendlinetoanothertrendlineshowingitsmorerecentpricechanges.Traderscanthenbasetheirbuyandselldecisionsonwhethertheshort-termtrendlinerisesaboveorbelowthemedium-termtrendline. ArticleSources Investopediarequireswriterstouseprimarysourcestosupporttheirwork.Theseincludewhitepapers,governmentdata,originalreporting,andinterviewswithindustryexperts.Wealsoreferenceoriginalresearchfromotherreputablepublisherswhereappropriate.Youcanlearnmoreaboutthestandardswefollowinproducingaccurate,unbiasedcontentinour editorialpolicy. J.WellesWilder,Jr."NewConceptsinTechnicalTradingSystems,"Pages64-70.TrendResearch,1978. ConstanceM.Brown."TechnicalAnalysisfortheTradingProfessional,"Page13.McGrawHillProfessional,1999. 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Provider Name Description PartOf GuidetoTechnicalAnalysisGuide TechnicalAnalysisofStocksandTrends 1of55 HowtoUsetheDowTheorytoAnalyzetheMarket 2of55 SupportandResistanceBasics 3of55 Support(SupportLevel)Definition 4of55 Resistance(ResistanceLevel) 5of55 TrendDefinitionandTradingTactics 6of55 Pullback 7of55 Breakout 8of55 Reversal 9of55 Overbought 10of55 OversoldDefinition 11of55 RelativeStrength 12of55 Candlestick 13of55 VolumeDefinition 14of55 GapDefinition 15of55 TheBestWaystoLearnTechnicalAnalysis 16of55 Top7BookstoLearnTechnicalAnalysis 17of55 BestTechnicalAnalysisCoursesin2022 18of55 TopTechnicalAnalysisToolsforTraders 19of55 TechnicalAnalysisStrategiesforBeginners 20of55 HowToUseaMovingAveragetoBuyStocks 21of55 HowtoUseVolumetoImproveYourTrading 22of55 TheAnatomyofTradingBreakouts 23of55 MarketReversalsandtheSushiRollStrategy 24of55 IntroductiontoTechnicalAnalysisPricePatterns 25of55 The5MostPowerfulCandlestickPatterns 26of55 ContinuationPatternDefinition 27of55 TrendlineDefinition 28of55 WhatIsaPriceChannel 29of55 Channeling:ChartingaPathtoSuccess 30of55 PlayingtheGap 31of55 DoubleTopandBottomDefinition 32of55 TechnicalAnalysis:TripleTopsandBottoms 33of55 WhatIsaHeadandShouldersPattern? 34of55 HowtoTradetheHeadandShouldersPattern 35of55 FlagDefinition 36of55 PennantDefinition 37of55 TriangleDefinition 38of55 WedgeDefinition 39of55 WhatIsaCupandHandlePattern? 40of55 StrategiesforTradingFibonacciRetracements 41of55 WhatIstheElliottWaveTheory? 42of55 ATrader'sGuidetoUsingFractals 43of55 TechnicalIndicatorDefinition 44of55 MovingAverage(MA)Definition 45of55 CrossoverDefinition 46of55 GoldenCrossvs.DeathCross:What'stheDifference? 47of55 WhatIsaBollingerBand®inTechnicalAnalysis? 48of55 OscillatorDefinition 49of55 MovingAverageConvergenceDivergence(MACD) 50of55 RelativeStrengthIndex(RSI) 51of55 StochasticOscillator 52of55 PriceRateOfChangeIndicator-ROC 53of55 MoneyFlowIndex-MFIDefinitionandUses 54of55 DivergenceDefinitionandUses 55of55 RelatedTerms DynamicMomentumIndexDefinition Dynamicmomentumindexistechnicalindicatorthatdeterminesifasecurityisoverboughtoroversoldandcanbeusedtogeneratetradingsignals. more MovingAverageConvergenceDivergence(MACD) MovingAverageConvergenceDivergence(MACD)isdefinedasatrend-followingmomentumindicatorthatshowstherelationshipbetweentwomovingaveragesofasecurity'sprice. more TrueStrengthIndex(TSI)Definition Thetruestrengthindex(TSI)isamomentumoscillatorusedtoprovidetradesignalsbasedonoverbought/oversoldlevels,crossovers,anddivergence. more PriceZoneOscillatorDefinitionandUses ThePriceZoneOscillatorplotsagraphthatshowswhetherornotthemostrecentclosingpriceisaboveorbelowanaveragedhistoricalprice. more MoneyFlowIndex-MFIDefinitionandUses TheMoneyFlowIndex(MFI)isatradingtoolthatincorporatesvolumeandpricedata.Itcanbeusedtogeneratetradesignalsbasedonoverboughtandoversoldlevelsaswellasdivergences. more WordenStochasticsDefinitionandExample TheWordenStochasticsindicatorplotsthepercentilerankofthelatestclosingpricecomparedtootherclosingvaluesinthelookbackperiod. more PartnerLinks RelatedArticles Strategy&Education TheTopTechnicalIndicatorsforOptionsTrading AdvancedTechnicalAnalysisConcepts KairiRelativeIndex:TheForgottenOscillator TechnicalAnalysisBasicEducation LearnAboutRelativeStrengthIndex(RSI)vs.StochasticOscillator TechnicalAnalysisBasicEducation OverboughtorOversold?UsetheRelativeStrengthIndextoFindOut TechnicalAnalysisBasicEducation Howdomovingaverageconvergencedivergence(MACD)andrelativestrengthIndex(RSI)differ? 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