What Is RSI? The Relative Strength Index Explained

RSI uses a lookback period, most commonly 14 candles. Over that window it averages all the up-closes and all the down-closes, then compares them.

The formula is RSI = 100 − (100 / (1 + RS)), where RS is average gain divided by average loss over the period. If every candle in the window closed up, average loss is zero and RSI reads 100. If every candle closed down, RSI reads 0. In practice it spends most of its time between 30 and 70.

In a strong trend, RSI can sit above 70 for days or weeks. Price keeps rising, RSI keeps printing high readings, and every trader who shorted the first 70 print has been stopped out repeatedly.

The correct interpretation is that an overbought RSI describes strength, not exhaustion. Selling into strength because a number crossed a threshold is one of the fastest ways to fail an evaluation. Traders who use RSI well treat extreme readings as a reason to tighten risk or wait for confirmation from price, not as an entry trigger by themselves.

Divergence is the setup most experienced traders actually care about. Bearish divergence occurs when price makes a higher high but RSI makes a lower high — the new price high was achieved with less momentum than the last one. Bullish divergence is the mirror image: a lower low in price alongside a higher low in RSI.

Divergence indicates weakening momentum, not a guaranteed reversal. It is most reliable at a level that already matters — a prior swing high, a session high, an area where price has reacted before. Divergence in the middle of a range is close to meaningless.

On an evaluation or funded account, the constraint is drawdown, not signal count. That changes how you should use an oscillator. RSI is best used as a filter that removes trades rather than one that generates them — for example, declining to buy a breakout when RSI is already at 82 and momentum has been fading for three candles.

A common structure is to use the 50 level as a directional bias on the higher timeframe and take entries only in that direction on the lower timeframe. Fewer trades, clearer invalidation, and a drawdown profile that does not tempt you into revenge trading.