RSI (Relative Strength Index)

Formula

RSI = 100 − [100 / (1 + RS)],  RS = Avg Gain / Avg Loss (typically 14 periods)

RS compares the average of recent gains to the average of recent losses over the lookback window (commonly 14 periods).

How to interpret it

Readings above 70 are traditionally seen as overbought (price may have risen too far, too fast), and below 30 as oversold (price may have fallen too far). These are signals to investigate, not automatic buy or sell triggers — strong trends can keep RSI extreme for a long time.

Example

If a stock has risen sharply for several weeks and its RSI reaches 78, it's in overbought territory by the classic definition, suggesting the rally may be stretched — though it can still continue.

Common uses

• Identify potentially overbought stocks when RSI rises above 70.
• Spot potentially oversold stocks when RSI falls below 30.
• Watch for bullish or bearish divergences between RSI and price as a possible reversal signal.
• Combine RSI with fundamental filters to time entries into already-undervalued stocks.

Limitations

• RSI is a technical, short-term indicator that says nothing about a company's value or fundamentals.
• It generates false signals in strong trends and works best in range-bound markets.
• It should support, not replace, fundamental analysis.