RSI: the indicator every investor should know

The RSI (Relative Strength Index) is one of the most widely used technical indicators in the world. It was developed by J. Welles Wilder in 1978 and, decades later, remains an essential tool for evaluating entry and exit timing in a stock.

Unlike trend indicators like moving averages, the RSI is an oscillator: it measures the speed and strength of price movements, not their direction. That is why it is especially useful for detecting moments when the market has "overreacted" in one direction.

What does the RSI measure exactly?

The RSI measures the speed and magnitude of recent price movements. Its value oscillates between 0 and 100. The higher it is, the more "buying pressure" there has been in the last 14 periods; the lower, the more "selling pressure".

How to calculate the RSI (step by step)

The calculation has three simple steps:

• •Step 1: Take the last 14 daily closes and separate the up days from the down days.
• •Step 2: Calculate the average of the gains (AG) and the average of the losses (AL) over those 14 days.
• •Step 3: Apply the formula: RS = AG / AL → RSI = 100 − (100 / (1 + RS))

Example: If over 14 days the stock rose an average of 1.5% on positive days and fell 0.5% on negative days: RS = 1.5 / 0.5 = 3 → RSI = 100 − (100 / 4) = 75. A stock in overbought territory.

RSI divergences: the most powerful signal

A divergence occurs when price and RSI move in opposite directions. It is one of the most reliable signals in technical analysis:

Real example: In late 2022, many tech stocks showed bullish divergences: the price kept falling, but the RSI stopped making new lows. It was an early signal of the 2023 rebound.

Common mistakes when using the RSI

• •Buying just because the RSI is oversold: In strong downtrends (like an entire sector collapse), the RSI can stay at 20-30 for weeks or months without bouncing.
• •Selling just because the RSI is overbought: Stocks in a strong uptrend (NVIDIA during the AI boom) can keep the RSI above 70 for months.
• •Using it in isolation: The RSI works best combined with moving averages, volume and the general market context.
• •Not adjusting the period: The 14-period RSI is standard, but in very volatile assets (crypto, small caps) a 7-period RSI is sometimes used for greater sensitivity.

RSI and moving averages: the ideal combination

The RSI works best when combined with trend analysis. StocksAnalyzer combines the RSI with the MA50 and MA200 moving averages to detect more reliable signals:

The golden rule: look for confirmation. An oversold RSI during an uptrend is an opportunity. The same RSI during a downtrend is a trap.

RSI across different timeframes

The daily RSI (14 days) is the most commonly used for medium-term investing. But there are variations:

• •Weekly RSI: More useful for long-term investors. Filters out daily noise and shows the real trend.
• •Hourly or 15-minute RSI: For intraday traders. Generates many false signals if not well combined.
• •7-period RSI: More sensitive, ideal for volatile assets. Generates more signals but also more false ones.

Frequently asked questions about the RSI

Does an RSI of 70 mean I should sell?

Not necessarily. In strong uptrends, the RSI can stay in overbought territory (>70) for weeks. What matters is whether the RSI is forming a bearish divergence or whether the overall market trend is also changing.

What is the best RSI level to buy?

There is no magic number. Many investors look for an RSI between 30 and 40 during uptrends as an entry zone. Combined with a technical support level and a rising moving average, the risk/reward ratio tends to be favorable.

Does the RSI work with cryptocurrencies?

Yes, but with caution. Cryptocurrencies are much more volatile than stocks, so the RSI generates more false signals. Many crypto traders use a 7-period RSI or adjust the thresholds (e.g., overbought >80, oversold <20) to adapt to that higher volatility.

Is the RSI the best technical indicator?

The RSI is one of the most versatile, but not the best for every situation. For detecting trends, moving averages are more reliable. For measuring volatility, ATR (Average True Range) or Bollinger Bands are more specific. The RSI shines in sideways markets and for detecting divergences.