Indicator School
RSI (Relative Strength Index): What Overbought and Oversold Actually Mean
The indicator everyone misuses. RSI doesn't measure whether a stock is cheap or expensive — it measures how lopsided recent price movement has been. What the 14-day RSI really is, how traders actually use it, the most common misuse, and the honest caveats.
The hook
The indicator everyone misuses. RSI doesn't measure whether a stock is cheap or expensive. It measures one thing: how lopsided recent price movement has been.
What it actually is, in plain English
RSI — the Relative Strength Index — is a momentum oscillator developed by J. Welles Wilder Jr. and introduced in his 1978 book, New Concepts in Technical Trading Systems. It is plotted on a scale of 0 to 100. Over the last 14 periods (days on a daily chart), it compares the average size of up-days to the average size of down-days. Big, fast gains push RSI toward 100; grinding losses drag it toward 0. It says nothing about value — only about the recent balance of strength and weakness in the price action.
The calculation, simplified
Relative Strength (RS) = average gain over 14 days ÷ average loss over 14 days. RSI = 100 − [100 ÷ (1 + RS)].
That's the whole thing. The 14-day default is convention, not science: shorten it for twitchier signals, lengthen it for smoother ones.