RSI indicator
Also called: Relative strength index, RSI, RSI 14, Overbought oversold indicator, RSI indikatörü, Göreceli güç endeksi
A momentum indicator comparing the average gain to the average loss over 14 candles on a 0 to 100 scale; above 70 is overbought, below 30 oversold.
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What does RSI measure?
RSI, the relative strength index, compares how much price rose with how much it fell over a set number of candles. J. Welles Wilder introduced it in 1978, and the standard setting is still the 14 periods he proposed. The result is a number between 0 and 100, drawn as a line in a separate panel under the chart.
The core of the calculation is simple. The average gain over the last 14 candles is divided by the average loss, and that ratio is converted to the 0 to 100 scale. If gains dominate, RSI rises above 50; if losses dominate, it falls below. Above 70 is usually called overbought, below 30 oversold.
Those names mislead. Overbought doesn't mean price is too expensive or due to fall. It only says gains have heavily outweighed losses over the last 14 candles. RSI measures momentum: how one-sided the recent move has been, not where price goes next.
How do you read RSI on a chart?
Take an example. Over the last 14 candles the average gain is 30 pips and the average loss 10 pips. The ratio is 3, and RSI works out as 100 − 100 / (1 + 3), which is 75. If the average loss were also 30 pips, the ratio would be 1 and RSI would sit exactly at 50.
Now picture a chart: price has climbed from 1.0800 to 1.0980 over 30 candles with almost no pullback, and RSI has been above 70 for ten candles, now at 78. That number says buyers are dominant. It isn't a reason to sell, and it isn't a reason to buy either.
The real question is structure. If the nearest clear low in this rally is 1.0890, the logical stop for someone buying now goes under it, and 1R is over 90 pips. For someone wanting to sell, there's no high above to anchor a stop, because price is making a new one every candle. A high RSI solves neither problem.
Where RSI helps more is context. In an uptrend, pullbacks can end with RSI around 40 to 50 rather than down at 30, and many traders watch that as a sign the trend is still healthy. In a sideways range, 70 and 30 mean more when read together with the range edges.
Try it on a chart
This chart has no RSI line, only candles. RSI measures the ratio of gains to losses over the last 14 candles, and you can see that directly here: count how many candles closed up and how long the pullbacks lasted. Then think about where price sits relative to the structure and where you could anchor a stop.
Your turn: read the chart and make your call.
No sign-up needed. Take a guess; when the chart opens, you'll see why.
The most common RSI mistake
Selling because RSI crossed 70. In a strong trend RSI can stay above 70 for weeks. Fade every overbought reading and you're standing against the trend, taking stop after stop. An overbought reading is also evidence that the trend is strong.
The reverse is just as wrong: chasing the top because a high RSI means a strong trend. Momentum may be strong, but if your entry is far from structure, your stop is either very wide or meaningless. Chasing isn't a plan either.
Treating divergence as a reversal signal on its own. If price makes a new high while RSI makes a lower one, momentum is slowing. That's useful, but trends can keep going for a long time while momentum fades. Divergence tells you to pay attention; a break in structure makes the call.
When does RSI stop working?
In strong trends the 70 and 30 levels lose their meaning. RSI sticks to one extreme for a long time and the textbook reading keeps calling you to the wrong side. Some traders use 80 and 20 in trends for this reason, but the problem isn't where the threshold sits; it's putting the indicator ahead of structure.
On news candles RSI jumps to an extreme in one candle. That isn't an excess; it's the event itself. Judging the first candles after a release by RSI means weighing a data-driven move with an indicator.
On small timeframes RSI hits the extremes constantly and noise rises. On a one-minute chart a tiny move over a few candles can push RSI above 70, and that number may mean nothing on the bigger picture.
Frequently asked questions
Should you sell when RSI is above 70?
No. RSI above 70 says gains have far outweighed losses over the last 14 candles; it doesn't say price will fall. In strong trends RSI can stay above 70 for a long time. A sell idea only makes sense once structure breaks, for example when the last higher low breaks on a close. RSI can then serve as a supporting witness that momentum is fading.
What is the best RSI setting?
The standard setting is 14 periods, and it's also the most widely used. A shorter period such as 7 makes RSI faster and noisier; a longer one such as 21 makes it slower and smoother. Searching old charts for the best setting usually just fits the past. The 14 period with 70 and 30, which most people watch, is enough to start with.
What is RSI divergence?
When price makes a new high but RSI makes a lower high, that's bearish divergence; when price makes a new low but RSI makes a higher low, that's bullish divergence. Both show momentum slowing. But a slowing trend isn't a reversing trend. Read divergence as a warning, and wait for a break in structure and a close before deciding.
