Forex RSI

The Relative Strength Index (RSI) is a momentum indicator that measures how strong recent gains are compared with recent losses. It moves between 0 and 100 and is shown in a separate panel below the price chart.

RSI was created by J. Welles Wilder Jr. and published in 1978. It is still one of the most popular indicators on every trading platform.

How RSI Is Calculated

RSI compares the average gain with the average loss over a period (normally 14 candles).

RS = Average gain ÷ Average loss

RSI = 100 − 100 ÷ (1 + RS)

For each candle, find the change in close. A rise is a gain; a fall is a loss (counted as a positive number).
The first average gain = sum of gains over 14 candles ÷ 14. Same for the first average loss.
After that, use Wilder's smoothing: new average = (previous average × 13 + current value) ÷ 14.
Divide average gain by average loss to get RS, then plug it into the RSI formula.

Example 1: The basic formula

Over 14 candles, EUR/USD's average gain is 12 pips and average loss is 6 pips.

RS  = 12 ÷ 6 = 2
RSI = 100 − 100 ÷ (1 + 2) = 100 − 33.33 = 66.67

Example 2: Wilder's smoothing

The previous average gain is 10 pips and the previous average loss is 8 pips. The new candle closes 24 pips higher (gain 24, loss 0).

New avg gain = (10 × 13 + 24) ÷ 14 = 154 ÷ 14 = 11.00 pips
New avg loss = (8 × 13 + 0) ÷ 14  = 104 ÷ 14 = 7.43 pips
RS  = 11.00 ÷ 7.43 = 1.48
RSI = 100 − 100 ÷ 2.48 = 100 − 40.31 = 59.69

Note: RSI = 50 means average gains equal average losses. RSI = 100 means there were no losses at all in the period; RSI = 0 means no gains at all.

The 14-Period Setting

Wilder recommended 14 periods, and it remains the default. On a daily chart that is 14 days; on a 1-hour chart it is 14 hours.

Period	Behaviour	Used by
7–9	Fast, reaches 70/30 often, more noise	Scalpers, short-term traders
14	Balanced — the standard	Most traders
21–25	Slow, rarely reaches extremes	Swing and position traders

Overbought and Oversold: 70 and 30

Above 70 = overbought. Price has risen fast. A pullback or pause is more likely.
Below 30 = oversold. Price has fallen fast. A bounce or pause is more likely.
Some traders use 80/20 for fewer, stronger signals.

In a range, RSI reaches 83 at the first top and 26 at the bottom. On the second swing price reaches the same levels but RSI only gets to 68 and 33 — turns do not need RSI extremes.

Example: A range trade with RSI

EUR/USD is ranging between 1.0800 and 1.0900. Price falls to 1.0800 and RSI drops to 26.

Signal    = RSI crosses back above 30 near support
Entry     = 1.0815
Stop      = 1.0785 (below the range)   → risk 30 pips
Target    = 1.0890 (near resistance)   → reward 75 pips  →  2.5R

Warning: Overbought does not mean "sell now". In a strong trend RSI can stay above 70 for a long time while price keeps rising. Selling just because RSI is high is one of the most common beginner mistakes.

The 50 Midline

The 50 level splits momentum in half.

RSI above 50

Average gains are bigger than average losses. Bullish momentum.

RSI below 50

Average losses are bigger than average gains. Bearish momentum.

Many trend traders use a cross of 50 as a filter: they only look for buys when RSI is above 50 and only sells when it is below 50.

RSI in Trends: The 40–80 and 20–60 Ranges

Technician Andrew Cardwell observed that RSI tends to move in different ranges depending on the trend. This is often called a range shift.

Market	Typical RSI range	What to look for
Uptrend	40 – 80	Dips to 40–50 are buying chances; 30 is rarely reached
Downtrend	20 – 60	Rallies to 50–60 are selling chances; 70 is rarely reached
Range	30 – 70	Classic overbought/oversold signals work best

In this strong uptrend, RSI never falls below 50 and spends much of its time above 70. Waiting for "oversold" would have meant never buying.

Tip: If RSI in an uptrend suddenly falls below 40 and cannot get back above 60, the trend may be changing. A range shift is an early warning, often before price structure breaks.

Failure Swings

Wilder himself considered failure swings stronger than plain overbought/oversold readings. They use only the RSI line, not price.

Bearish failure swing

RSI rises above 70 (e.g. to 76).
RSI pulls back (e.g. to 58).
RSI rallies but stays below 70 (e.g. to 66).
RSI breaks below the earlier low of 58 → sell signal.

Bullish failure swing

RSI falls below 30 (e.g. to 24).
RSI bounces (e.g. to 42).
RSI dips but stays above 30 (e.g. to 34).
RSI breaks above the earlier high of 42 → buy signal.

Divergence: An Introduction

Divergence happens when price and RSI disagree.

Bearish divergence — price makes a higher high, RSI makes a lower high. Upward momentum is fading.
Bullish divergence — price makes a lower low, RSI makes a higher low. Downward momentum is fading.

Price makes a higher high (1.0954 → 1.0963), but RSI makes a lower high (94 → 79). The slow, choppy second rally has less momentum, and price then falls 70 pips.

Note: Divergence can last a long time and price can keep going. Treat it as a warning, then wait for price confirmation — such as a break of a trendline or a bearish candlestick pattern. You will study this in depth in Divergence Trading.

Test Yourself With Exercises

The average gain is 15 pips and the average loss is 5 pips. What is the RSI?

66.7
80.0
75.0
25.0

RS = 15 ÷ 5 = 3. RSI = 100 − 100 ÷ (1 + 3) = 100 − 25 = 75.

What is the default RSI period recommended by Wilder?

Wilder's standard setting is 14 periods.

In a strong uptrend, which RSI range is typical?

20 – 60
40 – 80
0 – 30

In uptrends, RSI tends to hold 40–80. In downtrends it tends to hold 20–60.

Price makes a lower low, but RSI makes a higher low. What is this?

Bearish divergence
A failure swing
Overbought
Bullish divergence

Lower low in price + higher low in RSI = bullish divergence.

RSI has been above 70 for ten candles in a strong uptrend. What is the best interpretation?

Sell immediately — it is overbought
Momentum is strong; overbought alone is not a sell signal
The indicator is broken

In strong trends RSI can stay overbought for a long time. Overbought is not a sell signal on its own.