Level 2 · Lesson 3 / 11 · English
Relative Strength Index (RSI)
4 min reading · Exercises take additional time
0 of 11 lessons completed for this visit
The Relative Strength Index compares smoothed upward and downward price changes on a scale from zero to 100. It describes recent momentum within one price series, not relative performance against another asset. The related chart is computed from hypothetical observations and illustrates behaviour rather than recommending trades.
What you will learn
- Calculate RSI from average gains and losses.
- Interpret thresholds in trending and ranging conditions.
- Recognise smoothing, divergence and denominator limitations.
Illustrative educational chart · Not live market data
From price changes to a bounded oscillator
Separate each close-to-close change into a nonnegative gain and a nonnegative loss magnitude. A rise of three contributes gain three and loss zero; a fall of two contributes gain zero and loss two. Relative strength, RS, is average gain divided by average loss. RSI = 100 − 100 ÷ (1 + RS).
A conventional implementation uses 14 periods and Wilder smoothing. Initial average gains and losses commonly use simple averages of 14 changes, requiring 15 closes. Subsequent averages update as (previous average × 13 + current observation) ÷ 14. A simple rolling-average variant can produce materially different values, so identify the method rather than comparing labels alone.
Thresholds depend on market conditions
Levels such as 70 and 30 are common reference points, often labelled overbought and oversold. They describe relatively strong recent gains or losses, not necessarily mispricing. In a persistent uptrend RSI can remain elevated; in a sharp decline it can remain depressed while price continues falling.
A range-oriented reversal rule and a trend-following rule can interpret the same reading differently. Neither interpretation should be assumed profitable without testing. Shortening the period usually produces faster, more variable readings. Changing thresholds after seeing each losing trade is a form of hindsight adjustment, not evidence of a stable approach.
Divergence and edge cases
A bearish divergence may describe price making a higher high while RSI makes a lower high. This shows weaker measured momentum between selected peaks, but it does not establish when or whether a reversal will occur. Peak selection can be subjective, and a pivot may only become identifiable several bars later.
If average loss is zero and average gain is positive, RSI is conventionally 100. With positive losses and zero gains, RSI is zero. If both averages are zero, the expression is undefined and software conventions differ. Handle this case explicitly. Always separate indicator interpretation from position sizing, exit rules and the possibility of gaps or execution costs.
Key terms
- RS
- The ratio of smoothed average gains to smoothed average loss magnitudes.
- RSI
- A zero-to-100 transformation of the gain-to-loss ratio.
- Divergence
- A difference between selected price swings and indicator swings.
Hypothetical worked example · Not live market prices
Hypothetical RSI from supplied averages
- Assume smoothed average gain is 2 and smoothed average loss is 1.
- RS = 2 ÷ 1 = 2.
- RSI = 100 − 100 ÷ 3 = 66.666… ≈ 66.67.
| Quantity | Value |
|---|---|
| Average gain | 2 |
| Average loss | 1 |
| RS | 2 |
| RSI | 66.67 |
Simplified educational calculations. Costs, slippage and provider-specific adjustments apply where relevant; these are not actual returns.
Common mistakes to avoid
- Selling automatically whenever RSI exceeds 70.
- Confusing RSI with a comparison against a benchmark asset.
- Using future-confirmed swing points as though they were known immediately.
Lesson summary
RSI summarises the balance of recent gains and losses. Thresholds and divergences provide context, not reliable reversal deadlines or guaranteed entry signals.
Practical exercise
Calculate RSI when average gain and average loss both equal 1. The answer is 50. Then explain why an RSI of 80 alone cannot establish that the next price change will be negative.
Knowledge check
Check your understanding
Results apply to this attempt only and are not saved to a student account. No certificate is issued.
Answer all questions correctly and complete the exercise. Progress follows you between Academy pages for this visit only; it is not saved to an account and resets on reload.
Related lessons
Financial education, not personal investment advice. Leveraged Forex and CFDs can lead to substantial losses. Demo practice and correct quiz answers do not guarantee trading success.