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Glossary · Indicators

RSI (Relative Strength Index)

A momentum oscillator from 0 to 100 that compares the size of recent gains with recent losses; readings above 70 and below 30 are widely watched.

By Sky Trade editorial teamUpdated

The Relative Strength Index, developed by J. Welles Wilder, measures how strongly price has been rising versus falling over a lookback period, usually 14 candles. It averages the gains and the losses, takes their ratio (RS) and converts it to a 0–100 scale: RSI = 100 − 100 ÷ (1 + RS).

The traditional thresholds are 70 and 30: above 70 is labelled overbought, below 30 oversold. The most common misunderstanding is reading them as sell and buy signals. In a strong uptrend RSI can stay above 70 for a long time while price keeps climbing, and selling every touch of 70 is a reliable way to fight the trend.

More careful uses:

  • the 50 line as a trend filter, with readings above 50 favouring strength;
  • divergence between price and RSI as a warning that momentum is fading;
  • failure swings, where RSI fails to reach a new extreme.

Shorter periods make RSI faster and noisier; longer ones smoother and slower. In the Sky Trade terminal RSI is among the oscillators in the Indicators menu. Like every indicator it gives false signals, and on OTC instruments it measures a randomly generated path. The full guide is RSI explained.

Example

Over 14 M5 candles the average gain is 2.4 pips and the average loss 1.6 pips: RS = 1.5, so RSI = 100 − 100 ÷ 2.5 = 60. Momentum leans upward, but nowhere near an extreme.

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