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Relative Strength Index (RSI): What It Is, How It Works, and Formula

Authors
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    Name
    Loi Tran
    Twitter

Introduction

The Relative Strength Index (RSI) is a popular momentum oscillator used in technical analysis to measure the speed and change of price movements. It helps determine whether an asset is overbought or oversold, which can signal potential reversal points.

How RSI Works

RSI values range from 0 to 100. Traditionally, an asset is considered overbought when RSI is above 70 and oversold when RSI is below 30.

RSI Formula

The RSI is calculated as:

RSI=100−1001+RSRSI = 100 - \frac{100}{1 + RS}

Interpretation

  • RSI > 70: Asset may be overbought (potential for price correction or pullback)
  • RSI < 30: Asset may be oversold (potential for price bounce or reversal)
  • RSI between 30 and 70: Neutral zone

Usage in Trading

  • RSI can help traders identify entry and exit points.
  • Used in conjunction with other indicators for confirmation.
  • Divergence between RSI and price can signal trend reversals.

Conclusion

The RSI is a valuable tool for assessing market momentum and identifying potential turning points. However, it should be used alongside other analysis methods for best results.

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