The Relative Strength Index (RSI) is a momentum indicator that measures how strongly a market's price has been rising or falling over a set number of periods, usually 14. It moves on a scale from 0 to 100. Readings above 70 are traditionally called overbought and readings below 30 oversold, but those labels describe momentum, not a guaranteed turn in price.
TL;DR: RSI compares the average size of recent up moves with the average size of recent down moves and turns the result into a number between 0 and 100. Traders watch the 70 and 30 levels, divergence between RSI and price, and the 50 line. In a strong trend RSI can stay overbought or oversold for a long time, so it works best as a filter alongside structure and a fixed risk per trade.
Educational content only, not a personal recommendation. Examples are illustrative. Alpha Capital accounts are simulated accounts with simulated funds, and performance fees are not guaranteed.
What does RSI measure?
RSI was introduced by J. Welles Wilder in 1978. It answers one question: over the last 14 candles, have the gains been bigger than the losses, and by how much? When most of the recent movement has been upwards, RSI rises towards 100. When most of it has been downwards, RSI falls towards 0. A reading of 50 means gains and losses have been roughly equal.
Because it only looks at closing prices, RSI works the same way on any market and timeframe: EURUSD on the 15-minute chart, gold on the hourly chart or an index on the daily chart.
How is RSI calculated?
The formula has two steps. In plain words:
- Relative strength (RS) = the average gain over the period ÷ the average loss over the period. Gains and losses are measured from one close to the next, and both averages are positive numbers.
- RSI = 100 − (100 ÷ (1 + RS)).
Wilder's version smooths the averages: each new average keeps 13/14 of the previous one and adds 1/14 of the latest gain or loss. That is why RSI on your platform can differ slightly from a simple hand calculation over the last 14 closes.
Worked example (illustrative)
Over the last 14 hourly candles on EURUSD, the average gain is 8 pips and the average loss is 4 pips.
- RS = 8 ÷ 4 = 2
- RSI = 100 − (100 ÷ (1 + 2)) = 100 − 33.3 = 66.7
An RSI of 66.7 says buyers have had the stronger hand recently, but momentum is not yet in the traditional overbought zone. If the average gain rose to 12 pips with the same 4-pip average loss, RS would be 3 and RSI would be 75.
What do 70/30 and 80/20 mean?
Levels | Typical use | Trade-off |
|---|---|---|
70 / 30 | Wilder's original overbought and oversold levels; the default on most platforms | More signals, more of them early or false in a trend |
80 / 20 | Used in strongly trending or volatile markets to flag only extreme momentum | Fewer signals, and they come later |
50 line | A simple trend filter: above 50 favours buyers, below 50 favours sellers | Lags at turning points |
Overbought does not mean "sell now". It means price has risen quickly relative to its recent losses. Many traders wait for RSI to cross back below 70 (or above 30), or for a break in price structure, before acting on it.
What is RSI divergence?
Divergence is when price and RSI disagree.
- Bearish divergence: price makes a higher high, but RSI makes a lower high. The new high was reached with less momentum.
- Bullish divergence: price makes a lower low, but RSI makes a higher low. Selling pressure is fading.
Divergence is a warning, not a timing signal. A market can show two or three divergences before it actually turns, so it is most useful next to a clear level or a change in structure. Our guide to spotting trend reversals covers how to confirm a turn.
Why does RSI fail in strong trends?
RSI measures speed, and strong trends are fast. In a steady uptrend RSI can sit above 70 for days while price keeps climbing, so selling every overbought reading means repeatedly trading against the trend. The same happens below 30 in a sell-off.
Two common adjustments help:
- Shift the ranges. In an uptrend RSI often holds between about 40 and 80, and in a downtrend between about 20 and 60. A pullback to 40 in an uptrend can be a better reading than a spike to 70.
- Trade with the trend. Use RSI to time entries in the direction of the higher-timeframe trend, not to call tops and bottoms.
How do you combine RSI with a fixed risk per trade?
RSI can help you choose when to enter. It says nothing about how much to risk. That part comes from your stop loss and position size.
Worked example: sizing an RSI trade (illustrative)
On a $100,000 simulated account you risk 0.5% per trade, which is $500. EURUSD has pulled back in an uptrend, RSI on the hourly chart has dipped to 40 and turned up, and you place your stop 25 pips below the recent swing low.
- Risk per pip = $500 ÷ 25 pips = $20 per pip
- On EURUSD one standard lot is worth about $10 per pip, so the position is 2 lots
If the stop is hit, the loss is about $500 plus costs, whatever RSI was showing. The lot size calculator does this sum for any pair. If you are new to pips, start with what a pip is in forex.
How does RSI fit with prop firm rules?
In an evaluation, the rules are written as percentages of the account, so an indicator signal never changes the limit you trade under.
- Daily loss limit. Each Alpha Capital plan has a daily loss limit, for example 3% on Alpha Pro 6% and 5% on Alpha Swing (daily risk limits). At $500 per trade on a $100,000 account, six full losses in a row on Alpha Pro 6% would take you to the 3% limit.
- Repeated signals. Overbought and oversold readings can repeat many times in a trend. Fading each one with a full-size position is a quick way to stack losses in one session.
Treat RSI as one input, keep the risk per trade fixed, and the indicator's off days stay small.
Frequently asked questions
What is the best RSI setting?
14 periods is the standard and the default on most platforms. Shorter settings, such as 7 or 9, react faster but give more false signals. Longer settings, such as 21, are smoother but slower. Test any change on your own market and timeframe before relying on it.
Is RSI a leading or lagging indicator?
It is calculated from past closes, so it lags price like any indicator. Divergence can warn that momentum is fading before price turns, which is why some traders call it a leading signal, but it is not a forecast.
What does an RSI of 50 mean?
Average gains and average losses over the period have been about equal. Many traders read RSI above 50 as buyers in control and below 50 as sellers in control.
Can RSI be used on gold and indices?
Yes. RSI only uses closing prices, so it works the same way on forex, gold, indices and other markets. Volatile markets often suit wider levels such as 80 and 20.
Should I sell when RSI is above 70?
Not on that reading alone. Above 70 means strong recent momentum, which often continues in a trend. Most traders wait for confirmation, such as RSI crossing back below 70, divergence or a break in price structure, and always set a stop loss first.
Sources
- Alpha Capital help centre: daily risk limits
- J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978), where RSI was first published
- How to spot trend reversals in trading
Alpha Capital Group is a proprietary trading firm based in the United Kingdom. Accounts operate in a simulated environment with simulated funds. Performance fees are performance-based and outcomes are not guaranteed.
