Relative Strength Index (RSI)
A momentum oscillator scaled from 0 to 100 that measures the speed and magnitude of recent price changes to identify overbought or oversold conditions.
What is RSI?
The Relative Strength Index (RSI), developed by J. Welles Wilder Jr. in 1978, is a momentum oscillator that compares the average magnitude of recent gains to recent losses over a specified lookback period — typically 14 days — and plots the result on a 0–100 scale. An RSI reading above 70 is conventionally interpreted as overbought (the stock may have risen too far too fast), while a reading below 30 suggests oversold conditions. The RSI can also signal divergences: if a stock price makes a new high but the RSI does not, it may indicate weakening momentum and an impending reversal. While widely used, the RSI is a lagging indicator and generates false signals in strongly trending markets.
Example
During Nvidia's extraordinary 2023 rally, the stock's RSI repeatedly reached and sustained readings above 70 — technically overbought territory — yet the stock continued rising for months. This illustrates a common limitation of the RSI: in a strong secular uptrend driven by genuine earnings acceleration, oversold and overbought signals lose their predictive value, and trend-following approaches outperform mean-reversion strategies based solely on RSI.
Source: Investopedia — RSI