RSI was developed by J. Welles Wilder Jr. and works by comparing the average size of recent gains to recent losses over a specified lookback period (typically 14 bars). When gains consistently outpace losses, RSI rises; when losses dominate, RSI falls. The traditional interpretation uses two thresholds: above 70 signals that buying pressure may be overextended, while below 30 signals heavy selling pressure. However, in strong trending markets, RSI can remain elevated or depressed for extended periods, which means the indicator is most useful when read in the context of the broader trend structure rather than as a standalone reversal signal. The most actionable RSI signals are often divergences, where price makes a new high or low but RSI fails to confirm, hinting that momentum is quietly fading before price makes its turn.
