RSI explained: how the Relative Strength Index works and how to read it

The Relative Strength Index (RSI) is an oscillator that measures how strong recent up-moves have been compared with recent down-moves, on a scale from 0 to 100. It was introduced by J. Welles Wilder in 1978 and is still one of the most used indicators, partly because it is simple and partly because it is so easy to misread.

What RSI actually calculates

RSI looks at the closes of the last N candles, 14 by default:

1. For each candle, note how much it closed up from the previous close (gain) or down (loss).
2. Average the gains and average the losses over the period. Wilder used a smoothed average, so older values fade gradually rather than dropping off all at once.
3. Divide average gain by average loss. That ratio is called RS.
4. Convert it to a 0–100 scale: RSI = 100 − 100 / (1 + RS).

What the numbers mean in plain words:

• If gains and losses are equal, RS = 1 and RSI = 50.
• If average gain is three times average loss, RS = 3 and RSI = 75.
• If there were only gains and no losses, RSI approaches 100.

RSI is about the balance of up-closes and down-closes, not about price level. A market can sit at a record high with RSI at 50 if it got there slowly and evenly.

A worked example

On EUR/USD M1, suppose over the last 14 minutes the average up-close was 1.2 pips and the average down-close was 0.6 pips.

• RS = 1.2 / 0.6 = 2.
• RSI = 100 − 100 / (1 + 2) = 100 − 33.3 = 66.7.

Upward closes have been noticeably stronger than downward ones, but RSI has not reached the classic 70 line. If the next few minutes close up by a couple of pips each, RSI will move above 70; a single sharp down-close of 4 pips would pull it back toward the 50s. Note how one candle can shift the reading — on low timeframes that sensitivity matters a lot.

70/30, 80/20 and what "overbought" really means

The classic thresholds are 70 (overbought) and 30 (oversold). Some traders use 80/20 for fewer, more extreme signals, especially on short timeframes where RSI touches 70/30 constantly.

"Overbought" is a misleading word. It does not mean price is too high or due to fall. It means recent closes have been strongly one-sided. That can be the end of a move — or the middle of a powerful one.

Trending markets keep RSI overbought

In a strong uptrend, RSI can stay above 70 for a long time, dipping only to 40–50 on pullbacks. Selling every time RSI crosses 70 in such a market is one of the fastest ways to lose a series of trades. In a strong downtrend, the reverse is true: RSI can sit below 30 while price keeps sliding.

A useful adjustment many traders make: in an uptrend, treat RSI dipping to the 40–50 area as a sign the pullback may be ending, rather than waiting for 30, which may never come. In a downtrend, watch rallies that stall at 50–60.

The centre line at 50

The 50 level splits the scale in half. RSI above 50 means average gains are larger than average losses over the period; below 50, the reverse. Some traders use it as a simple momentum filter: favour Higher trades while RSI holds above 50, Lower trades while it holds below. It is not a precise signal — RSI crosses 50 frequently in a range — but it is a calmer way to use the indicator than chasing 70 and 30.

Divergence

A divergence happens when price and RSI disagree:

• Bearish divergence: price makes a higher high, RSI makes a lower high. The new high was reached with weaker upward momentum.
• Bullish divergence: price makes a lower low, RSI makes a higher low. The new low came with weaker selling.

Divergences are an early warning, not an entry signal. Strong trends can produce several divergences in a row before turning, or never turn at all. Many traders wait for price itself to confirm — a break of structure, for example — before acting.

RSI on short expiries

On S5–S30 charts, RSI swings between extremes many times a minute because each candle has only a few ticks. A reading of 80 on S10 often means "the last two candles went up". Practical consequences:

• Use longer settings or higher thresholds (for example 80/20) on second-based charts, or read RSI on M1 while timing on a lower timeframe.
• Mean-reversion trades on RSI extremes (Lower at 70, Higher at 30) are fragile when a trend is running.
• Expect the indicator to lag by a candle or two: it uses closes, so it reacts after the move.

Typical mistakes and false signals

• Treating 70 and 30 as automatic sell and buy signals.
• Ignoring the trend: RSI extremes in a trend are a sign of strength as much as of exhaustion.
• Changing the period after every loss to fit recent history.
• Stacking RSI with Stochastic and CCI and calling it confirmation — they measure very similar things. See combining indicators.
• Assuming RSI predicts OTC charts: on Sky Trade, OTC prices are generated by the server, do not track any real market and have an unpredictable next move, so RSI only describes the recent past there.

How to add it in the Sky Trade terminal

Open the Indicators menu above the chart and switch on RSI in the Oscillators group; it appears in its own panel below the price with 70 and 30 lines marked and a default period of 14, which you can change with the period stepper.