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 overbought or oversold conditions. RSI oscillates between 0 and 100 and is one of the most widely used technical indicators in trading, particularly effective in ranging markets for identifying potential reversal points.
Core Concept:
RSI compares the magnitude of recent gains to recent losses to determine if an asset is overbought (too many buyers) or oversold (too many sellers). It helps identify when price has moved too far, too fast.
Mathematical Foundation:
RSI = 100 - [100 ÷ (1 + (Average Gain ÷ Average Loss))] over a specified period (typically 14). Values above 70 indicate overbought, below 30 indicate oversold.
How RSI is Calculated: Step by Step
Average Gain & Loss
For first 14 periods:
- Sum all gains over 14 periods ÷ 14
- Sum all losses over 14 periods ÷ 14
- Gain = Close higher than previous
- Loss = Close lower than previous
Relative Strength
Formula:
RS = Avg Gain ÷ Avg Loss
After first 14 periods:
- Avg Gain = [(Prev Avg Gain × 13) + Current Gain] ÷ 14
- Avg Loss = [(Prev Avg Loss × 13) + Current Loss] ÷ 14
RSI Value
Final Formula:
RSI = 100 - [100 ÷ (1 + RS)]
Interpretation:
- If Avg Loss = 0, RSI = 100
- If Avg Gain = 0, RSI = 0
- If Gains = Losses, RSI = 50
How to Read RSI Signals
Overbought
- Level: RSI > 70
- Signal: Potential bearish reversal
- Strong Signal: RSI > 80
- Exit: When RSI crosses back below 70
- Caution: Can stay overbought in strong uptrends
- Crypto Tip: Use 75/25 instead of 70/30
Oversold
- Level: RSI < 30
- Signal: Potential bullish reversal
- Strong Signal: RSI < 20
- Exit: When RSI crosses back above 30
- Caution: Can stay oversold in strong downtrends
- Crypto Tip: RSI < 25 often signals capitulation
Divergence
- Centerline (50): Bullish above, bearish below
- Bullish Divergence: Price lower low, RSI higher low
- Bearish Divergence: Price higher high, RSI lower high
- Hidden Divergence: Trend continuation signal
- RSI 40-60: Neutral zone, no strong signal
RSI Trading Strategies
Strategy 1: Classic Overbought/Oversold Reversal
Buy Setup (Oversold):
- RSI drops below 30 (oversold)
- Wait for RSI to cross back above 30
- Price shows bullish reversal pattern
- Enter long with stop below recent low
- Target: Next resistance or RSI 50-60
- Best For: Ranging markets only
Sell Setup (Overbought):
- RSI rises above 70 (overbought)
- Wait for RSI to cross back below 70
- Price shows bearish reversal pattern
- Enter short with stop above recent high
- Target: Next support or RSI 40-50
- Best For: Ranging markets only
Critical Rules:
- Never trade this in strong trends
- Always wait for RSI to exit the zone
- Combine with price action confirmation
- Use 75/25 levels for crypto
Strategy 2: RSI Divergence Trading
Regular Bullish Divergence
- Setup: Price makes lower low, RSI makes higher low
- Interpretation: Downward momentum weakening
- Entry: On bullish candle after divergence
- Stop: Below the recent price low
Regular Bearish Divergence
- Setup: Price makes higher high, RSI makes lower high
- Interpretation: Upward momentum weakening
- Entry: On bearish candle after divergence
- Stop: Above the recent price high
RSI Quick Reference Guide
| RSI Value | Interpretation | Trading Action | Market Condition |
|---|---|---|---|
| 0-20 | Extremely Oversold | Strong buy signal | Capitulation near |
| 20-30 | Oversold | Potential buy, wait for exit | Ranging or downtrend |
| 30-40 | Weak Bearish | Monitor | Neutral |
| 40-60 | Neutral | No signal | Consolidation |
| 60-70 | Weak Bullish | Monitor | Neutral |
| 70-80 | Overbought | Potential sell, wait for exit | Ranging or uptrend |
| 80-100 | Extremely Overbought | Strong sell signal | Parabolic move |
SAPP Academy Research Team
Trading Education Team
Reviewed by SAPP Academy educators
Last updated: 2026 • 15 min read