RSI Calculator

What is the RSI Indicator?

The Relative Strength Index (RSI) is a momentum oscillator developed by J. Welles Wilder in 1978. It measures the speed and magnitude of recent price changes to evaluate whether an asset is overbought or oversold. The RSI oscillates between 0 and 100 and is typically displayed as a line chart beneath the price chart.

RSI is one of the most widely used technical indicators among traders and analysts. When RSI moves above 70, the asset is generally considered overbought, meaning it may have risen too far too fast and could be due for a pullback. When RSI drops below 30, the asset is considered oversold, suggesting it may have been pushed down excessively and could be primed for a bounce. The 50 level serves as a midpoint, with readings above 50 indicating bullish momentum and readings below 50 indicating bearish momentum.

Unlike trend-following indicators such as moving averages, RSI is a leading indicator that can signal potential reversals before they appear on the price chart. This makes it an invaluable tool for timing entries and exits, confirming trends, and spotting divergences between price action and momentum.

RSI Formula Explained Step by Step

The RSI calculation uses a smoothed moving average approach. Here is how the formula works, step by step:

1. Calculate price changes: For each period, compute the change in closing price from the previous period. A positive change is a gain; a negative change is a loss (expressed as a positive number).
2. Calculate Average Gain: For the initial RSI, sum all gains over the lookback period and divide by the period length. For subsequent values, use the smoothed formula: Average Gain = ((Previous Average Gain x (Period - 1)) + Current Gain) / Period.
3. Calculate Average Loss: Apply the same approach as Average Gain but using the loss values. Average Loss = ((Previous Average Loss x (Period - 1)) + Current Loss) / Period.
4. Calculate Relative Strength (RS): RS = Average Gain / Average Loss. This ratio compares the magnitude of recent gains to recent losses.
5. Calculate RSI: RSI = 100 - (100 / (1 + RS)). This normalizes the RS value into a 0-100 range. When Average Loss is zero, RSI equals 100. When Average Gain is zero, RSI equals 0.

The smoothing technique used in the RSI formula means that the indicator considers all prior data, not just the most recent period. This gives RSI a more stable and reliable reading compared to a simple moving average approach.

How to Interpret RSI Values

Understanding what different RSI readings mean is essential for making informed trading decisions:

• RSI below 30 (Oversold): The asset has experienced significant selling pressure and may be undervalued at current levels. This does not automatically mean you should buy, but it signals that sellers may be exhausted and a bounce or reversal could be approaching. In strong downtrends, RSI can remain oversold for extended periods.
• RSI above 70 (Overbought): The asset has experienced strong buying pressure and may be overextended. This suggests caution for new long positions and potential opportunity for short sellers. In strong uptrends, RSI can stay above 70 for weeks or even months, so overbought alone is not a sell signal.
• RSI Divergence: One of the most powerful RSI signals. Bullish divergence occurs when price makes a lower low but RSI makes a higher low, indicating weakening bearish momentum. Bearish divergence occurs when price makes a higher high but RSI makes a lower high, signaling fading bullish momentum. Divergence often precedes significant reversals.
• RSI Centerline Crossover: When RSI crosses above 50, it indicates that average gains are exceeding average losses, confirming bullish momentum. When RSI crosses below 50, bearish momentum is dominant. Some traders use 50 as a trend filter, only taking long trades when RSI is above 50 and short trades when RSI is below 50.

Learn more in our RSI Strategy Guide →