TRADING GLOSSARY

RSI (Relative Strength Index): measuring overbought and oversold

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of price changes on a scale from 0 to 100. Developed by J. Welles Wilder in 1978, it is one of the most popular technical indicators used by traders worldwide.

How RSI works

RSI is calculated by comparing the average gain and average loss over a specified period (typically 14). When recent gains exceed losses, RSI rises. When losses exceed gains, RSI falls. Readings above 70 are considered overbought (potentially due for a pullback). Readings below 30 are considered oversold (potentially due for a bounce).

RSI in different contexts

In ranging markets: Overbought (>70) and oversold (<30) signals work well as reversal indicators. Buy near 30, sell near 70. In trending markets: RSI can remain overbought or oversold for extended periods without a reversal. In strong uptrends, RSI often stays between 40-80. In strong downtrends, it stays between 20-60. Use the midline (50) as the trend filter instead of the 70/30 extremes.

RSI divergence

The most powerful RSI signal is divergence. If price makes a new high but RSI makes a lower high, buying momentum is weakening — bearish divergence. If price makes a new low but RSI makes a higher low, selling pressure is fading — bullish divergence.

AskTrade’s Technical Analysis Agent calculates RSI across multiple timeframes and identifies divergence patterns automatically.

Disclaimer: This is for educational purposes only and does not constitute financial advice. Trading involves significant risk of loss.

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AskTrade analyses are AI-generated and do not constitute financial advice.