What Is the RSI?
The Relative Strength Index (RSI) is a momentum oscillator that measures the speed and magnitude of recent price changes on a scale of 0 to 100. Developed by J. Welles Wilder Jr. in 1978, it’s one of the most widely used technical indicators in the world.
The RSI answers a simple question: how strong is the current price momentum? Has the stock been going up too fast (overbought) or going down too fast (oversold)?
How RSI Is Calculated
The RSI uses a 14-period lookback window (14 days on a daily chart). It compares the average gain on up days to the average loss on down days:
- Calculate the average gain and average loss over the last 14 days.
- Divide the average gain by the average loss to get the Relative Strength (RS).
- Apply the formula: RSI = 100 – (100 / (1 + RS)).
You don’t need to calculate this manually — every charting platform and Scanance does it automatically. What matters is understanding what the number means.
Reading the RSI Scale
- RSI below 30 — Oversold. The stock has been falling rapidly and may be due for a bounce. This is a potential buying opportunity.
- RSI between 30–70 — Neutral zone. No extreme reading. The RSI doesn’t give a strong signal here.
- RSI above 70 — Overbought. The stock has been rising rapidly and may be due for a pullback. This is a potential selling or shorting opportunity.
- RSI at 50 — The midpoint. In uptrends, RSI tends to stay above 50. In downtrends, it tends to stay below 50. The 50 level itself can act as support or resistance.
RSI Divergences
One of the most powerful RSI signals is a divergence — when price and RSI disagree:
- Bullish divergence — Price makes a lower low, but RSI makes a higher low. This suggests selling pressure is weakening and a reversal may be coming.
- Bearish divergence — Price makes a higher high, but RSI makes a lower high. This suggests buying pressure is weakening and a pullback may be coming.
Divergences are early warning signals. They don’t guarantee a reversal, but they alert you to watch for one.
How Scanance Uses RSI
Scanance applies the standard 14-day RSI to every stock in its database and generates two types of signals:
- RSI Buy — RSI is below 30. The stock is oversold and may be due for a bounce.
- RSI Short — RSI is above 70. The stock is overbought and may be due for a pullback.
The scanner also shows the exact RSI value for each signal, so you can see how extreme the reading is. An RSI of 15 is much more oversold than an RSI of 28 — both trigger a signal, but the lower value indicates a more extreme condition.
Common RSI Mistakes
- Buying oversold stocks in downtrends — The #1 RSI mistake. Always check the trend first.
- Selling strong stocks just because RSI is high — In bull markets, RSI can stay above 70 for weeks. Don’t short a rocket ship.
- Using RSI alone — RSI is a momentum indicator, not a trend indicator. Combine it with moving averages for context.
- Ignoring the timeframe — RSI on a 5-minute chart is very different from RSI on a daily chart. Scanance uses daily RSI for the most reliable signals.