Relative Strength Index (RSI)
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a 0–100 scale, with readings above 70 traditionally treated as overbought and below 30 as oversold.
What it measures
RSI compares the average size of up-closes against the average size of down-closes over a lookback window (default 14 candles), then normalises the ratio to a bounded 0–100 range. It answers a single question: how one-sided has the recent price action been?
Parameters
| Name | Default | Range | Note |
|---|---|---|---|
| period | 14 | 2–50 | Shorter periods react faster and produce more crosses; longer periods smooth the line and cut noise. |
| overbought | 70 | 60–90 | Upper threshold. Trending markets can hold above 70 for extended stretches — the level is a bias, not a signal. |
| oversold | 30 | 10–40 | Lower threshold. Symmetric to overbought; same caveat applies during strong downtrends. |
How it behaves
In a range, RSI oscillates cleanly between the two thresholds and mean-reverts. In a trend, it embeds — sitting above 70 (or below 30) for many candles while price keeps extending. Divergence (price making a new extreme, RSI not) is a classical exhaustion cue but leads by an unpredictable amount.
When it misleads
RSI is a bounded oscillator, so it fails hardest at the exact moments people reach for it: strong directional moves. Buying every cross back above 30 in a bear market bleeds capital because the "oversold" reading is the correct reading — the market is genuinely weak, not stretched. Two guards actually help: (1) require a trend filter (price above a long moving average) before taking long RSI signals, and (2) treat divergence as context, never as an entry on its own.
Backtest result
Sourced backtest in preparation — we're running the rule on our own historical candles before publishing numbers we can stand behind.
FAQ
- What is a good RSI period?
- 14 is the default from J. Welles Wilder's original 1978 formulation and remains the most widely referenced. Traders using RSI for scalping sometimes drop to 5–7; swing traders occasionally lift it to 21 for smoother signals.
- Is RSI a leading or lagging indicator?
- It is derived from past prices, so mechanically it lags. Divergence is the closest RSI comes to a leading signal, and even that only warns of momentum loss — not of a specific reversal price or time.
- Can RSI work on any timeframe?
- Yes — the calculation is timeframe-agnostic. Behaviour changes though: 1-minute RSI is noisy and produces many false crosses; daily RSI moves slowly and generates a handful of signals per quarter.
Build a strategy with RSI
Drop the block into the Nodlow builder and backtest on real historical data.
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