Relative Strength Index (RSI)

The relative strength index (RSI) is a momentum indicator that measures how strongly an asset's price has been rising or falling over a recent period, expressed on a scale from 0 to 100. It was introduced by the American engineer and trader J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems, and it is now a standard feature of almost every charting platform for shares, currencies, commodities and cryptocurrencies such as Bitcoin (BTC).

The RSI compares the size of recent gains with the size of recent losses, usually over 14 periods. Traditional interpretation treats readings above 70 as "overbought" and below 30 as "oversold". It is an oscillator, unlike trend-following tools such as the moving averages behind a golden cross. Despite the similar name, it has nothing to do with "relative strength" comparisons between two different shares.

Think of a car's rev counter. It does not tell you where the car is going or how fast it is travelling, but it tells you how hard the engine is working right now. If the needle stays in the red zone for long, something usually has to give: the driver changes gear or eases off.

The RSI is a rev counter for price moves. A high reading means buyers have been pushing hard and gains have far outweighed losses recently. A low reading means sellers have been in control. It does not say a reversal must come, only that the recent pace has been unusually one-sided.

The RSI is calculated from the ratio of average gains to average losses:

where the relative strength $RS$ is:

• $n$ is the look-back period; Wilder used 14.
• Average gain is the mean of the price increases in the period, counting falls as zero.
• Average loss is the mean of the price decreases in the period, written as positive numbers, counting rises as zero.

Worked example: over the last 14 days a coin rose on eight days and fell on six. The rises add up to $16.80 and the falls to $11.20. The average gain is $16.80 \div 14 = 1.20$ and the average loss is $11.20 \div 14 = 0.80$. So $RS = 1.20 \div 0.80 = 1.5$, and $\text{RSI} = 100 - 100 \div 2.5 = 100 - 40 = 60$. A reading of 60 shows that buyers had the upper hand, but not to an extreme degree.

After the first value, Wilder smoothed the averages rather than recalculating them from scratch. Each new average gain is $\left(\text{previous average gain} \times 13 + \text{today's gain}\right) \div 14$, and the same for losses. This makes the indicator less jumpy, and different software can show slightly different values depending on how the first average is seeded.

Wilder suggested 70 and 30 as the overbought and oversold boundaries, and they remain the default. Some traders widen them to 80 and 20 for volatile assets, including many crypto tokens, where readings above 70 can persist for weeks during a strong bull market. Equally, an asset in a deep bear market can stay oversold for long periods, so an RSI below 30 is not by itself a reason to buy the dip (see BTFD).

Beyond the threshold levels, analysts look at several other features that Wilder described:

• Divergence. If price makes a new high but the RSI makes a lower high, upward momentum may be fading; the reverse pattern at lows is called a bullish divergence.
• Failure swings. A move above 70, a pullback, and a second rise that fails to pass the previous RSI peak is read as a possible top.
• The midline. Readings that stay above 50 tend to accompany uptrends, and readings below 50 downtrends.

In crypto markets, RSI readings on Bitcoin and large altcoins are widely quoted on social media around an all-time high (ATH) and during sharp sell-offs, and RSI rules are common building blocks for crypto trading bots.

The RSI uses only past closing prices, so it says nothing about an asset's fundamentals, news or market capitalization. Its signals are probabilistic and frequently wrong in strongly trending markets, where "overbought" assets keep rising and "oversold" ones keep falling, as in a dead cat bounce. Results also depend on the period chosen: a 7-period RSI is far more sensitive than a 21-period one.

Thinly traded tokens with low liquidity produce erratic readings, and prices on such markets can be pushed around by market manipulation. Traders who act on RSI signals while using leverage face the added risk that a move continues long enough to trigger forced liquidation. For these reasons the RSI is generally used as one input among several, often with trading volume and trend measures, and with a stop-loss order to limit losses.

• CMT Association (professional body for technical analysts)