Lesson T7.1 · 1 of 6 · Oscillators and momentum
RSI explained: Wilder’s formula and how to read the 70 and 30 levels
RSI compares a price’s recent gains with its recent losses and turns the result into a number between 0 and 100. Above 70, the price has risen fast; below 30, it has fallen fast. Neither is a sell or buy signal: in a strong trend, RSI can stay above 70 for weeks.
Terms in this lesson
- RSI
- Shows whether the price rose or fell too fast over the last two weeks.
- Price momentum
- How much the stock has risen or fallen in recent months: the force of the move.
- Stop-loss
- An order that sells automatically if the price falls to a level you choose.
What RSI is and how it is calculated
Definition
What is RSI?
A number between 0 and 100 that compares average gains with average losses.
J. Welles Wilder published it in 1978 in his book “New Concepts in Technical Trading Systems”. The formula is RSI = 100 - 100 ÷ (1 + RS), where RS = average gain ÷ average loss over the last 14 periods (days, on a daily chart). Losses are entered as positive numbers. When gains equal losses, RS = 1 and RSI = 50.
Example
A full 14-day calculation
8 up days ($14 in total) and 6 down days ($7 in total).
Both the average gain and the average loss are divided by 14, not by the number of up or down days.
- Average gain14 ÷ 14 = $1.00 a day
- Average loss7 ÷ 14 = $0.50 a day
- RS1.00 ÷ 0.50 = 2
- RSI100 - 100 ÷ (1 + 2) = 66.67
The next day the price rises by $2.10. Wilder does not start again from scratch; he smooths the averages: new average gain = (1.00 × 13 + 2.10) ÷ 14 = 1.0786; new average loss = (0.50 × 13 + 0) ÷ 14 = 0.4643. RS = 2.3231 and RSI rises to 69.91. Each new day carries a weight of one fourteenth, and older days fade gradually rather than dropping out all at once.
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Create a free accountRSI above 70 and below 30: what overbought means
Wilder called an RSI above 70 overbought and one below 30 oversold. The words sound like advice, but they only describe the past: the price has risen (or fallen) quickly. In a strong trend, RSI can stay in the zone for a long time.
The price moves sideways around 101, then climbs to about 116. RSI crosses above 70 on candle 8 and stays there until candle 22. In the pullback that follows, RSI dips to 52.9 but stays above 50, and the price resumes its rise to about 123.
RSI does not always leave the oversold zone quickly. On the next chart, RSI has just dropped below 30.
The 50 line: using RSI as a trend filter
An RSI above 50 means that, over the last 14 periods, the average gain has been bigger than the average loss. Many traders use the 50 line as a filter: they look for buys only while RSI holds above 50, and for sells only while it stays below.
The average gain is bigger than the average loss. On the chart above, RSI only fell to 52.9 during the pullback.
The average loss is bigger. Short rallies often stall in the 50-60 area.
A buy signal carries more weight when RSI holds above 50 on pullbacks.
RSI in a trading plan with a stop-loss
RSI can tell you when to look at a share. It cannot tell you when you are wrong. That is the job of the stop-loss, and your position size comes from how much you are prepared to lose.
Lessons are educational. They are not a recommendation to buy or sell. Investing involves risk and you can lose money. Sources: J. Welles Wilder Jr., “New Concepts in Technical Trading Systems” (1978); StockCharts ChartSchool, “Relative Strength Index (RSI)” (calculation, zones, Constance Brown’s ranges), accessed 29 October 2026. The charts are teaching diagrams, not real prices.