Published: 11. January 2024

The Relative Strength Index or RSI is a momentum indicator that compares the magnitude of recent gains to recent losses over a period. RSI is usually used to assess whether a market is overbought or oversold. If you calculate RSI on a daily chart, it is done using the following formula:

RSI = 100 – 100/(1 + RS*)

Here, RS equals the average of x number of positive days divided by the average of x number of negative days. However, RSI can also be used on shorter charts.

As can be seen on the graph above, the RSI lies in the range between 0 and 100. A market is considered by some to be overbought when RSI reaches around 80, which means that the market may have gone a bit too high, and there is an increased probability that the market will pull back. Similarly, a market is considered to be oversold if the RSI is under about 20, and this can be an indication that the market may be undervalued, and an increase is possible.

If you use RSI as a trader, you should be aware that large increases and drops in price can affect the RSI and create false selling and buying signals. Therefore, it is best to use RSI as a supplement to other indicators or other elements of technical analysis, and you should not trade based on RSI without considering other factors as well.