What Is RSI and How to Read It

RSI is most commonly calculated using 14 periods. On a daily chart, that means 14 trading days. On a 1-hour chart, it means 14 hours.

The standard formula is:

RSI = 100 - (100 / (1 + RS))

Where:

• RS (Relative Strength) equals the average gain divided by the average loss over the chosen lookback period.

The calculation works in two main steps:

1. Measure the average gains and average losses over the last 14 periods.
2. Compare those values to determine the strength of buying pressure relative to selling pressure.

If gains are larger than losses, RSI rises.
If losses are larger than gains, RSI falls.

The output always stays between 0 and 100:

• Near 0 → very strong downside momentum
• Near 100 → very strong upside momentum

Because RSI is smoothed, it does not jump instantly. It responds gradually as new price data is added.

RSI is typically interpreted using three main zones: overbought, oversold, and neutral.

Overbought zone (above 70)

An RSI reading above 70 is traditionally considered overbought. This suggests that recent buying pressure has been strong and may be becoming stretched.

However, “overbought” does not mean price must fall immediately.

In strong uptrends, RSI can remain above 70 for extended periods while price continues climbing. This is known as “riding momentum.” Selling simply because RSI is above 70 can lead to exiting strong trends too early.

Instead, traders often treat high RSI readings as:

• A caution signal
• A possible sign of short-term exhaustion
• A reason to tighten risk management

Context matters. In a powerful bullish trend, high RSI may confirm strength rather than warn of reversal.

Oversold zone (below 30)

An RSI reading below 30 is traditionally considered oversold. This suggests strong recent selling pressure.

In range-bound markets, oversold conditions can lead to rebounds. Traders sometimes look for price stabilization and confirmation signals when RSI drops below 30.

However, just like with overbought conditions, oversold does not automatically mean price will bounce.

In strong downtrends, RSI can remain below 30 for extended periods while price keeps falling. Buying too early in these conditions can be risky.

Instead, oversold RSI often signals:

• Heavy bearish momentum
• Potential exhaustion
• A need for confirmation before entering trades

Neutral zone (30 to 70)

The area between 30 and 70 is often overlooked, but it provides important trend information.

In healthy uptrends:

• RSI often stays between 40 and 80.
• Pullbacks may stop near 40–50 before momentum resumes upward.

In strong downtrends:

• RSI may remain between 20 and 60.
• Rallies may fail near 50–60 before downside momentum returns.

The middle range can help traders identify whether momentum is strengthening or weakening within an existing trend.

For example:

• Rising RSI from 45 to 60 suggests strengthening bullish momentum.
• Falling RSI from 55 to 40 suggests increasing bearish pressure.

One of the most powerful RSI concepts is divergence.

Divergence occurs when price and RSI move in opposite directions.

Bullish divergence

• Price makes a lower low.
• RSI makes a higher low.

This suggests that downside momentum is weakening even though price is still falling. It can signal a potential reversal or bounce.

Bearish divergence

• Price makes a higher high.
• RSI makes a lower high.

This suggests that upside momentum is weakening even though price continues rising.

Divergence is not a guaranteed reversal signal. In strong trends, divergence can appear multiple times before price actually turns. However, it often provides early warning that momentum is shifting.

RSI behaves differently depending on market structure.

In range-bound markets, RSI tends to move predictably between 30 and 70. Overbought and oversold signals are more reliable in these conditions.

In strong trending markets, RSI signals can produce false reversals. Instead of focusing on 30 and 70, traders often adjust expectations:

• In uptrends, RSI pullbacks toward 40–50 can act as support.
• In downtrends, RSI rallies toward 50–60 can act as resistance.

Understanding market structure helps avoid misinterpreting RSI readings.

RSI measures momentum. It does not measure trend direction directly.

For that reason, many traders combine RSI with:

• Moving averages (to identify trend)
• Support and resistance levels
• Volume analysis
• MACD (to compare momentum perspectives)

RSI works best as part of a system rather than a standalone signal.

DailyIQ includes RSI as one component inside its broader Technical Score framework.

Rather than treating RSI above 70 or below 30 as automatic signals, DailyIQ evaluates RSI alongside:

• Trend structure
• Volatility conditions
• Volume confirmation
• Other momentum indicators

This prevents any single indicator from dominating the analysis.

For example:

• High RSI with strong trend alignment may confirm strength.
• High RSI with weakening structure may signal caution.
• Divergence combined with breakdown levels may increase reversal probability.

RSI becomes more powerful when viewed as part of a weighted framework.

• Do not trade RSI in isolation.
• Always identify the primary trend first.
• Use RSI for timing within structure, not for predicting tops and bottoms.
• Look for divergence at key support or resistance levels.
• Adjust RSI expectations based on trending vs ranging conditions.
• Combine RSI with risk management rules.

Most importantly, remember that RSI measures momentum — not certainty.