Relative Strength Index and Momentum
The Relative Strength Index, or RSI, compares smoothed upward and downward price changes on a 0–100 scale. It measures recent momentum, not a company’s value or the probability of a reversal.
How it works
For a conventional 14-period Wilder RSI, calculate positive gains and positive magnitudes of losses from consecutive closes. Initialize each average with a 14-change simple average. Later average gain=(previous average gain×13+current gain)/14; apply the same smoothing to losses. RS=average gain/average loss and RSI=100−100/(1+RS). Zero-loss and entirely flat sequences need a documented platform convention.
Worked example
Suppose smoothed average gain is 1.5 and average loss is 0.5. RS=3, so RSI=100−100/4=75. If the next price change is a loss of 1, the new gain average is 19.5/14≈1.3929 and loss average is 7.5/14≈0.5357. RS≈2.6 and RSI≈72.22. That decline measures a change in the gain/loss balance, not proof that price must fall next.
Amounts, prices and scenarios are fictional teaching examples. They exclude any effects not explicitly stated and are not trade recommendations.
Limits and common mistakes
RSI can remain above 70 in a strong uptrend and below 30 in a strong downtrend. Divergences depend on pivot selection. Match smoothing, input price and warm-up period when reproducing a vendor’s value.
Knowledge check
Does RSI 75 mean a 75% chance of a decline?
Read the explanation
No. RSI is an oscillator value from a calculation. A probability claim requires a separately defined and tested outcome with representative data.
References and further reading
These sources explain the underlying concepts and specifications. They do not endorse QBMFX Academy. Check the relevant market, protocol version and reporting rules before applying an example.