Plain-English definition
RSI compresses recent positive and negative price changes into a bounded 0–100 momentum reading.
What it measures
Relative momentum strength across a selected lookback.
Formula
RSI = 100 − 100 / (1 + average gain ÷ average loss), usually using Wilder smoothing.
How to read it
Higher values show stronger recent gains; lower values show stronger recent losses. Context matters more than a single 70 or 30 reading.
Common signals
- Momentum regime above or below 50
- Pullback hold near 40/60
- Divergence
- Range reversal from an extreme
Best market conditions
Ranges, divergence studies, and pullbacks inside established trends.
Weak market conditions
Strong one-way moves where overbought or oversold readings persist.
Default settings
Length 14 with reference levels at 30, 50, and 70.
Alternative settings
Shorter lengths react faster; longer lengths smooth noise. Trend traders often study 40/60 behavior instead of only 30/70.
Repainting and confirmation
Standard RSI is fixed after the source candle closes. Live-candle values can still move.
Common mistakes
- Treating overbought as an automatic sell
- Ignoring trend regime
- Using divergence without confirmation
- Changing settings after every loss
Example use
In an established uptrend, test whether RSI holding above 40 provides better pullback context than fading every move above 70.
Strategy ideas worth testing
- Trend-regime pullbacks
- 50-line momentum filter
- Divergence plus structure
- ATR-segmented RSI results
Complementary indicators
Summary verdict
Simple and versatile, but its labels are routinely misinterpreted. Use RSI as context, not certainty.
Frequently asked questions
Is RSI above 70 always bearish?+
No. Strong trends can keep RSI elevated.
Does RSI repaint?+
Not after candle close in a standard implementation.
What length should I use?+
Fourteen is a baseline, not a law. Test changes without overfitting.