What is RSI?
RSI converts recent upward and downward price movement into a value between 0 and 100. It is designed to describe momentum, not to predict a guaranteed reversal.
What does it measure?
The balance between average gains and average losses over a selected lookback period.
How is it calculated?
RSI = 100 - (100 / (1 + RS)), where RS is the ratio of average gains to average losses.
Common interpretation.
- Values above 70 are commonly described as overbought and values below 30 as oversold.
- Overbought does not mean price must immediately fall, and oversold does not mean price must immediately rise.
- The 50 level can be used descriptively to compare positive and negative momentum.
- Divergence describes a disagreement between price movement and oscillator movement.
How traders use it for market context.
- RSI can provide momentum context around important session levels.
- It is generally more informative when combined with price structure rather than used as a standalone trigger.