# RSI indicator: formula, how to read it, and limits

> What the RSI indicator measures, Wilder's 14-day formula with a worked example, what overbought and oversold mean, divergence, and what the evidence says.

Written by [Tactfolio research team](https://tactfolio.com/about/editorial-policy.md), published 2026-10-16, updated 2026-10-16.

The RSI indicator (relative strength index) is a number from 0 to 100. It compares the size of a stock's recent gains with its recent losses. J. Welles Wilder Jr. created it in 1978 and used the last 14 days. Readings above 70 are often called overbought and readings below 30 oversold, but a strong trend can stay above 70 for a long time.

## Key points

- RSI measures the speed of recent price moves. It says nothing about what a company is worth.
- The usual setting is 14 periods, most often 14 trading days.
- Above 70 means recent gains were much bigger than losses. Below 30 means the reverse.
- "Overbought" does not mean a price must fall. Strong stocks can stay overbought for weeks.
- Research on RSI by itself is thin, and reviews of trading rules in general find mixed results.

## What is the RSI indicator?

The RSI is a momentum indicator. **Momentum** here means how fast and how far a price has moved lately. RSI turns that into one number on a 0 to 100 scale.

Wilder introduced it in his book [New Concepts in Technical Trading Systems](https://openlibrary.org/isbn/0894590278) (Trend Research, 1978). The same book introduced other tools traders still use, such as the Parabolic SAR.

RSI is one of several common chart tools. Our guide to the [best indicators for trading](https://tactfolio.com/learn/best-indicators-for-trading.md) compares it with moving averages, MACD and Bollinger Bands.

## The RSI indicator formula

RSI comes from two averages: the average gain on up days and the average loss on down days.

1. For each of the last 14 days, write down the gain if the price rose, or the loss if it fell.
2. Add the gains and divide by 14. That is the **average gain**.
3. Add the losses and divide by 14. That is the **average loss**. Treat it as a positive number.
4. Divide the average gain by the average loss. Wilder called this **RS** (relative strength).
5. RSI = 100 − 100 ÷ (1 + RS).

If there were no down days at all, RSI is 100. If there were no up days, it is 0.

## How to calculate RSI: a worked example

Say a stock rose on 8 of the last 14 days and fell on 6. The up days added up to $14. The down days added up to $7.

- Average gain = $14 ÷ 14 = $1.00
- Average loss = $7 ÷ 14 = $0.50
- RS = $1.00 ÷ $0.50 = 2
- RSI = 100 − 100 ÷ (1 + 2) = 100 − 33.3 = **66.7**

Now the next day, the stock rises $2. Wilder did not start over each day. He smoothed the old average with the new day:

- New average gain = ($1.00 × 13 + $2) ÷ 14 = about $1.07
- New average loss = ($0.50 × 13 + $0) ÷ 14 = about $0.46
- RS = about 2.31
- RSI = 100 − 100 ÷ 3.31 = about **69.8**

One strong day moved RSI from about 67 to about 70. That is why RSI can jump fast on short settings.

## How to read RSI

RSI tells you how lopsided recent moves have been. The middle, 50, means gains and losses were about the same size.

| RSI reading | What it says about recent moves | How traders often read it |
| --- | --- | --- |
| Above 70 | Gains have been much bigger than losses | Overbought |
| 50 | Gains and losses about equal | Neutral |
| Below 30 | Losses have been much bigger than gains | Oversold |

The 70 and 30 lines are common habits. Some traders use 80 and 20 to get fewer signals.

## What is RSI divergence?

**Divergence** is when price and RSI point different ways. Say a stock makes a new high, but RSI makes a lower high than last time. The price went up, but with less force behind it. Traders call that bearish divergence.

The reverse is bullish divergence. Price makes a new low, but RSI makes a higher low. Divergence is one of the most talked-about RSI patterns. It can last a long time before anything happens, and sometimes nothing happens at all.

## Why overbought can stay overbought

An RSI above 70 says the stock has been rising fast. It does not say the rise is over. In a strong uptrend, RSI can stay between 60 and 90 for weeks while the price keeps climbing.

This links to a well-studied pattern called momentum. Assets that have risen over the past few months have tended to keep rising for a while. Our guide to [momentum stocks](https://tactfolio.com/learn/momentum-stocks.md) explains it. Selling every time RSI hits 70 means selling the strongest stocks early.

The same goes for oversold. A stock in a long slide can sit below 30 while it keeps falling.

## Does the RSI indicator work?

The evidence is weak and mixed. Research on RSI rules by themselves is thin.

Reviews of technical trading rules as a group are mixed too. Cheol-Ho Park and Scott Irwin reviewed 95 modern studies in [2007](https://doi.org/10.1111/j.1467-6419.2007.00519.x). 56 found gains, 20 found losses and 19 were mixed. They warned that many studies tested so many rules that some were bound to look good by luck.

So treat any RSI rule as an idea to test. Our page on [why past results mislead](https://tactfolio.com/docs/concepts/why-past-results-mislead.md) shows how a rule can fit old data by luck. A trend filter such as a [moving average](https://tactfolio.com/learn/moving-average.md) has more published tests behind it, and even those show long stretches of lagging.

## Common mistakes

- **Selling only because RSI is high.** In a strong trend, high RSI can be normal for months.
- **Buying a falling stock because RSI is low.** Oversold can get more oversold.
- **Changing the setting until the chart looks right.** A 9-day RSI that fit last year may not fit next year.
- **Following RSI alerts from strangers.** Some paid alert services sell RSI "signals" with no full record. Read about [trading signals](https://tactfolio.com/learn/trading-signals.md) before you pay for any.
- **Mixing time frames.** A 14-day RSI and a 14-minute RSI are different tools.

## Try it on Tactfolio

You can test an RSI rule on past prices before you trust it. The [strategy builder](https://tactfolio.com/builder) reads Wilder's RSI over any period you pick. Its Enter / Exit block can buy a fund when RSI drops below 30. It then holds until RSI rises above 70, as the [builder reference](https://tactfolio.com/docs/builder.md) shows. The backtest then shows every year, including the bad ones. Strategies on US stocks and ETFs run on daily prices and hold long positions only.

## Common questions

### What does the RSI tell you?

RSI tells you how strong recent gains were compared with recent losses, on a 0 to 100 scale. A high number means the price has been rising fast. It does not tell you what the price will do next.

### What are the best RSI settings?

Wilder used 14 periods, and that is still the default on most charts. Shorter settings, like 2 or 5 days, move faster and give more signals. No setting is best for every market, so test the one you plan to use.

### Is RSI above 70 a sell signal?

Not by itself. Above 70 means recent gains outweighed recent losses by a lot. In a strong trend, RSI can stay above 70 while the price keeps rising.

### What is the difference between RSI and relative strength?

RSI compares one stock's own gains with its own losses. "Relative strength" in investing often means comparing one stock's return with another stock or an index. The names sound alike but they measure different things.

### What is the difference between RSI and the stochastic oscillator?

Both are momentum readings on a 0 to 100 scale. RSI compares the size of recent up days with recent down days. The [stochastic oscillator](https://tactfolio.com/learn/stochastic-oscillator.md) shows where today's close sits inside the recent high to low range, so it often swings faster.

### Is RSI good for day trading?

The formula works on any time frame, from minutes to months. Short time frames mean more trades, and costs add up faster. Tactfolio tests stock and ETF rules on daily prices, so it does not test day trading rules.

## The details

- **First average gain and loss:** simple averages of the first 14 gains and 14 losses.
- **Wilder smoothing after that:** new average = (previous average × 13 + today's value) ÷ 14. This equals an exponential average with a weight of 1/14 on the newest day.
- **RSI:** 100 − 100 ÷ (1 + average gain ÷ average loss). If the average loss is zero, RSI is 100.
- Different charting tools may seed the first average differently. Their numbers can differ a little for the same stock.

## Put it into practice

- [Backtesting](https://tactfolio.com/backtesting.md): Free backtesting software for stocks, ETFs, and crypto perps.
- [Stock trading bot](https://tactfolio.com/bots/stock-trading-bot.md): Build a stock trading bot from rules you can read, backtest it on decades of US prices, and run it daily on paper or in your own Alpaca account.
- [Paper trading](https://tactfolio.com/paper-trading.md): Paper trade a whole strategy with pretend money at real prices.

## Sources

- [New Concepts in Technical Trading Systems](https://openlibrary.org/isbn/0894590278), J. Welles Wilder Jr., Trend Research, 1978 (Open Library record), accessed 2026-10-16
- [What Do We Know About the Profitability of Technical Analysis?](https://doi.org/10.1111/j.1467-6419.2007.00519.x), Park and Irwin, Journal of Economic Surveys, 2007, accessed 2026-10-16
- [Builder reference](https://tactfolio.com/docs/builder), Tactfolio docs, accessed 2026-10-16
- [Glossary](https://tactfolio.com/docs/glossary), Tactfolio docs, accessed 2026-10-16