Relative Strength Index (RSI) Explained
Learn what the Relative Strength Index measures, how traders read overbought and oversold levels, and where RSI signals can fail.
Common Formula
RSI = 100 - (100 / (1 + average gain / average loss))
What RSI measures
The Relative Strength Index is a momentum oscillator that compares recent average gains with recent average losses. It is usually plotted from 0 to 100 below a price chart, with many traders watching the 30 and 70 zones as rough reference levels.
How traders read it
A high RSI can show strong upside momentum or a stretched rally. A low RSI can show strong downside momentum or a stretched selloff. The useful question is not whether RSI crosses one level, but whether the signal fits the trend, volume, and broader market context.
Why divergence matters
Divergence happens when price makes a new high or low while RSI does not confirm it. This can flag fading momentum, but it is only a research clue. Trends can continue for a long time after divergence appears.
Best Used For
- Spotting stretched short-term moves
- Comparing momentum across recent swings
- Finding divergence to research further
Common Mistakes
- Treating overbought as an automatic sell signal
- Ignoring the larger trend
- Using RSI without checking price structure or volume
Practice on real charts
Use indicators as a research layer on top of price, volume, source timestamps, and market context. ProStockCharts pages are for research and education, not investment advice.
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