Relative Strength Index

The Relative Strength Index was introduced by J. Welles Wilder Jr. in his 1978 book 'New Concepts in Technical Trading Systems.' It is calculated using the ratio of average gains to average losses over a specified look-back window — most commonly 14 periods — and scaled to oscillate between 0 and 100.

The RSI calculation begins by separating price changes into positive (up-day) and negative (down-day) values over the look-back period. The average gain is the mean of all up-day changes; the average loss is the mean of all down-day changes. These are then used to compute the 'relative strength' (RS = average gain / average loss), which is transformed into the RSI value using the formula: RSI = 100 - (100 / (1 + RS)). Wilder used a smoothed version of the average that gives more recent periods progressively less incremental weight, making the RSI somewhat responsive to recent price action.

In Wilder's original framework, RSI readings above 70 were characterized as indicating 'overbought' conditions — meaning the pace of recent gains had been historically unusual relative to losses over that window — and readings below 30 were characterized as 'oversold.' These thresholds have been widely reproduced in technical analysis literature. It is important to understand, however, that 'overbought' and 'oversold' are descriptive terms about the historical relationship between recent gains and losses, not forecasts. Strong trending markets can maintain RSI readings above 70 or below 30 for extended periods without reversing.

Technical analysts also study 'divergence' patterns between RSI and price — for example, historical instances where a security made a new price high while the RSI reading was lower than its prior peak. Such divergences have been studied historically as potentially indicating weakening momentum in the underlying price trend, though the empirical evidence on their predictive reliability is mixed and dependent on market conditions and the specific security.

RSI is one of the most widely used indicators in retail and professional technical analysis. It is built into virtually every charting platform and is frequently combined with other indicators and price analysis frameworks. As with all technical indicators, RSI summarizes historical price data mathematically; it does not provide guarantees or reliable forecasts about future price direction.