RSI 14

The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale from 0 to 100. Developed by J. Welles Wilder Jr. in 1978, RSI helps identify overbought and oversold conditions, potential trend reversals, and the strength of price movements. The 14-period version is the most commonly used setting.

The RSI calculation involves several steps:

1. Calculate average gains and losses over 14 periods
2. RS (Relative Strength) = Average Gain / Average Loss
3. RSI = 100 - (100 / (1 + RS))

Subsequent calculations use smoothed averages:

Average Gain = (Previous Avg Gain × 13 + Current Gain) / 14
Average Loss = (Previous Avg Loss × 13 + Current Loss) / 14

Traditional interpretation:

• RSI > 70: Overbought; price may have risen too far, too fast
• RSI 50-70: Bullish momentum; uptrend likely intact
• RSI = 50: Neutral; balanced buying/selling pressure
• RSI 30-50: Bearish momentum; downtrend likely intact
• RSI < 30: Oversold; price may have fallen too far, too fast

Key trading applications:

• Overbought/oversold signals: RSI extremes can indicate potential reversal points
• Divergences: When price makes new highs/lows but RSI doesn't confirm, trend may be weakening
• Centerline crossovers: Crossing above/below 50 can confirm trend direction
• Failure swings: RSI patterns that may precede price reversals

Important caveats:

• Extended trends: Stocks can remain overbought or oversold for extended periods in strong trends
• False signals: Overbought doesn't mean "sell immediately"—strong stocks often stay overbought
• Context matters: Adjust thresholds based on market conditions (80/20 in strong trends, 60/40 in ranges)
• Lagging indicator: RSI reflects past price action; it cannot predict future movements

RSI works best combined with other analysis—trend identification, support/resistance levels, and volume confirmation. Use it to add context to trading decisions rather than as a standalone signal generator.