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Guide 02 / Relative Strength Index

RSI, the momentum gauge

The Relative Strength Index turns recent gains and losses into a number between 0 and 100. This guide covers the math, the common levels and the traps.

705030RSI (14)
Price on top, 14-period RSI below with the 70 and 30 reference lines. Illustrative chart generated from sample data, not real market data.

What RSI measures

The Relative Strength Index was introduced by J. Welles Wilder Jr. in his 1978 book New Concepts in Technical Trading Systems. It compares the size of recent up closes with recent down closes and squeezes the result into a scale from 0 to 100. A high reading means recent gains have outweighed recent losses; a low reading means the reverse. It is a momentum oscillator: it describes how price has been moving, not where it will go next.

The formula

Wilder's default is 14 periods. First, split each bar's close-to-close change into a gain (if up) or a loss (if down, stored as a positive number). Then average them over the lookback.

RS = Average gain / Average loss RSI = 100 - 100 / (1 + RS)

The first average is a plain average of the first 14 values. After that Wilder uses his own smoothing, which keeps a memory of earlier bars:

Average gain = (previous average gain x 13 + current gain) / 14 Average loss = (previous average loss x 13 + current loss) / 14

This is why the same 14-period RSI can differ slightly between platforms: some seed or smooth differently, and the exact starting bar of the chart affects early values.

The 70 and 30 levels

Wilder suggested 70 and 30 as reference lines. A reading above 70 is commonly labelled overbought and below 30 oversold. These words need care. In a strong trend RSI can stay above 70 or below 30 for a long time, so a reading there is a description of momentum, not a signal that price must reverse. Some traders adjust the levels, for example 80 and 20 in fast markets or 60 and 40 as trend zones, and some shorten the period for more sensitivity at the cost of more noise.

The 50 line

The midpoint marks the balance between average gains and losses. Many traders read RSI holding above 50 as a sign of upward momentum and below 50 as downward momentum, using it more as a trend filter than as an overbought and oversold tool.

Divergence

A bearish divergence is when price makes a higher high but RSI makes a lower high, suggesting the push is losing momentum. A bullish divergence is the mirror image: price makes a lower low while RSI makes a higher low. Divergences are popular because they can appear near turning points, but they can also show up repeatedly while a trend continues. Most traders look for some confirmation, such as a break of structure, before leaning on one.

Limitations

  • Lag. RSI is derived from past closes, so it confirms movement more than it predicts.
  • Trends. Overbought can stay overbought. Using 70 and 30 as automatic reversal points is a well-known way to fight a trend.
  • Parameter choice. Different lookbacks produce noticeably different lines on the same price.
  • One input. It uses only the close, so it ignores volume and the range inside each bar.

Choosing the period

A shorter period, such as 7 or 9, makes RSI swing more widely and hit the extremes more often, so it produces more signals and more false ones. A longer period, such as 21 or 25, produces a calmer line that reaches 70 and 30 less often. Neither is right in general. The useful habit is to pick a period, keep it fixed while you study how it behaves on your market and timeframe, and write down what you observe before risking money on it.

Reading RSI in context

RSI is most informative when combined with something that describes price structure. A bullish divergence at a level where the market has turned before is a different story from the same divergence in the middle of nowhere. Many traders also compare RSI behaviour across timeframes: a pullback that takes a five-minute RSI to 30 while the hourly RSI holds above 50 is a different picture from one where both are falling.

It is also worth watching how RSI behaves in the trend you are in. Some analysts describe uptrends as RSI holding roughly above 40 on pullbacks, and downtrends as RSI struggling to get much above 60. That range-shift idea is one more reason fixed 70 and 30 levels should not be treated as universal.

Using it in NinjaTrader Desktop

RSI ships with NinjaTrader 8 and can be added from the Indicators window on any chart, where the period and the reference lines can be changed. NinjaTrader Guru covers adding and configuring indicators step by step.

To pair RSI with other momentum, trend and volume tools inside NinjaTrader 8, Browse the NinjaTrader software listing at Affordable Indicators, or ask questions in the Discord community.

Quick answers

What is the default RSI setting?
Wilder's original and the most common setting is 14 periods, with reference lines at 70 and 30.
Is RSI above 70 a sell signal?
Not by itself. It means recent gains have been large relative to recent losses. In strong trends RSI can stay above 70 for a long time.
Why does my RSI differ from another platform?
Platforms can differ in how they seed the first average, which bar the chart starts on, and which smoothing variant they use.

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Educational only, not financial advice. Futures trading involves substantial risk of loss.