Indicator
Relative Strength Index (RSI)
The Relative Strength Index compares the size of recent gains to the size of recent losses and expresses the result on a scale from 0 to 100. It is a momentum oscillator: it describes how one-sided recent movement has been.
Shorter periods swing to extremes far more frequently.
Chart runs on a generated sample series, not live or historical exchange data. Values are computed with the same functions CernoQuant uses to run backtests.
How it is calculated
How to read it
- A high reading means recent up-closes have been large relative to down-closes. It is a statement about the recent past, not a prediction.
- Readings above 70 are conventionally labelled "overbought" and below 30 "oversold". These are labels applied to the scale, not signals — a strong trend can hold RSI above 70 for a long stretch.
- The 50 level is sometimes used to describe which side momentum has been on, since it is the point where average gains and average losses are equal.
What it does not tell you
- Overbought does not mean a fall is due. In a sustained trend RSI stays extreme precisely while the move continues, and traders who fade every extreme reading tend to fight the strongest part of it.
- It is bounded at 0 and 100, so it compresses. Once pinned near an extreme it stops distinguishing between strong and very strong movement.
- Divergence between price and RSI is widely discussed and easy to spot in hindsight. It appears frequently without being followed by any reversal.
Common settings
A 14-period lookback with 70/30 bands is the original convention from J. Welles Wilder. Shorter lookbacks produce more extreme readings more often.
Frequently asked questions
What does an RSI of 70 mean?
It means average gains over the lookback have been substantially larger than average losses. It is a description of recent one-sidedness. It does not mean price is about to fall.
Can RSI stay overbought for a long time?
Yes, and this is the most common way the indicator is misread. During a strong trend RSI can remain above 70 for weeks. Treating each such reading as a reversal cue means repeatedly opposing the dominant move.
What is RSI divergence?
It describes price making a new extreme while RSI does not. It is straightforward to identify after the fact and occurs often without any reversal following, which is why it is better treated as a description than a trigger.
Which RSI period is best?
None universally. 14 is the original convention. Shorter periods reach extremes more often, which increases both the number of readings and the number that lead nowhere.
Related
- MACD (Moving Average Convergence Divergence) — Indicator
- Momentum in Markets — Concept
- Lagging vs Leading Indicators — Concept
Educational use only
This page is educational material about how a technical tool is calculated and read. It is not investment advice, not a recommendation to buy or sell anything, and not a signal service. No indicator predicts future prices. CernoQuant is a trading journal and analytics platform, not a SEBI-registered investment adviser. Trading decisions and their outcomes are yours alone.
Indicators describe the market. A journal describes you.
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