RSI (Relative Strength Index) explained

Momentum

The full guide, with worked examples and what our tests found: RSI Explained: RSI(14) and RSI(2) · Mean Reversion Strategy Studies

What RSI measures

RSI compares the average size of recent up-closes with recent down-closes over a lookback period (default 14) and scales the result from 0 to 100. Traders use it to flag prices that have risen or fallen unusually fast, conventionally called overbought and oversold. It is one of the most widely used momentum oscillators.

How RSI readings are interpreted

Readings above 70 are conventionally called overbought and readings below 30 oversold. Both describe recent strength or weakness; neither predicts the next move by itself. In strong trends RSI can stay above 70 or below 30 for long periods. Many traders read divergence (price makes a new high while RSI does not) as a sign that the move is losing strength; that is a convention, and whether it helps depends on the rule built on it.

Conventional RSI levels

Above 70: conventionally described as overbought
Below 30: conventionally described as oversold
50 level: the midline; above 50, recent gains have outweighed recent losses
Divergence: RSI failing to confirm a new price high or low is commonly read as weakening momentum
In strong trends some traders use 80/20 in place of 70/30

Where RSI works, and where it does not

Traders commonly favour RSI's 30 and 70 readings in ranging markets, where price oscillates. In strong trends RSI can stay overbought or oversold while the trend continues, so counter-trend readings there are often treated with caution, and some traders watch the 50 line instead. These are conventions: how a reading performs depends on the setting, the trend filter and the exit, and has to be tested.

Indicators commonly read alongside RSI

MACD: RSI oversold + MACD bullish crossover is a commonly cited confluence
Bollinger Bands: RSI oversold + price at the lower band is a frequently cited combination
ADX: RSI readings are conventionally given more weight when ADX is below 25 (ranging) and less when above 25 (trending)

Known limitations of RSI

In a strong uptrend an overbought reading is often followed by further gains, so many traders do not treat it as a sell signal on its own
Around news events RSI can jump to an extreme and snap back within days
Short settings (2 to 7 periods) reach the extremes far more often: Connors' RSI(2) rule uses this for short-term mean reversion, while traders reading 30 and 70 often find them too noisy

RSI in practice

RSI is commonly paired with a trend filter such as the 200-day moving average, with oversold readings taken only while price sits above it
In trending markets many traders watch the 50 line rather than 70 and 30
Hidden divergence — price pulling back while RSI holds a higher low — is conventionally read as trend continuation
A 9-period setting is common on short timeframes, 21 for weekly analysis

Other momentum indicators

MACD
Stochastic Oscillator
Stochastic RSI
ConnorsRSI

On the test bench

RSI Mean Reversion Backtest: Which RSI Entry Works Best?
Four RSI entries under one dip-buying rule (above the 200-day average, out on a close above the 5-day average) on 483 S&P 500 stocks, 2006 to 2026, against buying and holding.

Does RSI(2) Work? Oversold and Overbought Tested on S&P 500 Stocks
RSI(2) crossing 10 and 90 on 483 S&P 500 stocks, 2006 to 2026: 4 of 8 signal tests differed clearly from ordinary days over the next 5 days.

Does RSI Work? RSI 30 and 70 Tested on S&P 500 Stocks
RSI(14) crossing 30 and 70 on 483 S&P 500 stocks, 2006 to 2026: 3 of 8 signal tests differed clearly from ordinary days over the next 20 days.

RSI Explained: RSI(14) and RSI(2)
RSI explained: the calculation, 30 and 70, and the 2-day RSI read with 10 and 90, with our tests of both settings on S&P 500 stocks.

Mean Reversion Strategy Studies
Mean reversion trading explained: why prices revert, the entry and exit rules and the risks, with our tests of RSI, RSI(2), ConnorsRSI and Stochastic RSI signals on S&P 500 stocks and a backtest of the four.

Testing ideas built on RSI

A reading of RSI can be written as an exact rule and checked against historical data — as a full strategy with entries, exits and costs, or as a single condition and what followed it:

How to backtest a trading strategy without code
Event analysis: what follows a market event

Plot it yourself. Add this indicator to a chart, change every parameter and watch the line move, then backtest how the rule would have behaved on historical data — free on the S&P 500 ETF, no card.

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This is reference material, not advice. It describes what each indicator measures and how its readings are conventionally interpreted. Nothing here is a recommendation to buy or sell anything, and no indicator predicts future prices. GU Analyser is an analytical tool — no money is ever traded here.