The Relative Strength Index is a specific momentum calculation developed by J. Welles Wilder in 1978 — not a vague "sentiment gauge," but a formula that produces the same number for the same price data every time.
The Formula and Thresholds
RSI = 100 − 100/(1 + RS), where RS is the average gain of up periods divided by the average loss of down periods, typically over Wilder's standard 14-period default. Readings above 70 are considered standard overbought territory; below 30 signals oversold — though these are guidelines, not strict rules, and traders following strongly trending instruments often shift to 80/20 to avoid premature signals firing too early in a sustained trend.
RSI divergence — where price makes a new high but RSI fails to confirm with its own new high — is a more reliable signal than the raw overbought/oversold threshold alone, since it flags weakening momentum before price itself turns.
Someone Trading a Range-Bound Stock: The standard 70/30 thresholds tend to work reasonably well here.
Someone Trading a Strongly Trending Stock: Standard 70/30 can fire premature signals — shifting to 80/20 is a common, adjustment traders make.
Use RSI the Way
- Use the 14-period default unless you have a specific reason to adjust it.
- Watch for divergence, not just threshold crossings.
- Adjust thresholds (80/20) for strongly trending instruments.
See MACD explained for a complementary momentum indicator.
