RSI (Relative Strength Index)
Learn how to calculate and interpret RSI (Relative Strength Index) with its formula, a worked example, industry context and common mistakes.
Measures recent price momentum on a 0 to 100 scale by comparing average gains with average losses.
Formula
RSI = 100 - (100 / (1 + Average Gain / Average Loss))
Worked exampleAn RSI of 72 suggests strong recent momentum, but it may also indicate an extended move.
Calculation steps
- Calculate average gains and losses over 14 periods.
- Divide average gain by average loss to get relative strength.
- Convert relative strength into the 0 to 100 RSI scale.
How to interpret it
RSI above 70 is often treated as overbought, while RSI below 30 is often treated as oversold. Confirmation from trend and volume matters.
Industry context
Fast-moving growth stocks can stay overbought longer than slow defensive stocks, while weak stocks can remain oversold during downtrends.
Accounting and market variations
Definitions, reporting choices, periods, capital structures, and market conventions can change how this metric should be compared.
- Do not buy only because RSI is below 30.
- Do not sell only because RSI is above 70.
- Check whether the broader trend confirms or contradicts RSI.