Technical & Chart AnalysisRelative Strength Index
RSI (Relative Strength Index)
A momentum oscillator that measures the speed and magnitude of recent price changes on a 0 to 100 scale.
What RSI (Relative Strength Index) means
The Relative Strength Index, developed by J. Welles Wilder, is a momentum oscillator bounded between 0 and 100. It is calculated as 100 minus 100 divided by one plus the relative strength, where relative strength is the average gain divided by the average loss over the lookback period, conventionally 14. Wilder's smoothing is applied to both averages, so each new reading blends the current period's change with the running average rather than recomputing a plain mean. The result rises as advances dominate the window and falls as declines dominate it.
Conventional interpretation treats readings above 70 as overbought and below 30 as oversold, with the 50 line used as a rough momentum divide. More durable applications include divergence, where price makes a new extreme that the RSI fails to confirm, and failure swings. Many trend traders shift the bands, using 40 as support in an uptrend and 60 as resistance in a downtrend. The critical limitation is that RSI can remain pinned above 70 or below 30 for extended periods in a strong trend, so an extreme reading is not a reversal signal on its own.
Worked example
If EUR/USD shows an average gain of 0.0032 and an average loss of 0.0011 over 14 periods, relative strength is 2.91 and the RSI reads about 74, an overbought value that does not by itself justify a short.
Related terms
- OscillatorAn indicator that fluctuates around a centre line or within fixed bounds, used mainly to gauge momentum extremes.
- DivergenceA disagreement between price and an indicator, where one makes a new extreme that the other fails to confirm.
- OverboughtA condition in which an oscillator sits at a high extreme after a rapid advance, indicating stretched momentum rather than a sell signal.
- OversoldA condition in which an oscillator sits at a low extreme after a rapid decline, indicating stretched momentum rather than a buy signal.
- MomentumThe rate at which price is changing, used to judge whether a move is accelerating or losing force.
Frequently asked questions
What does RSI (Relative Strength Index) mean in forex trading?
A momentum oscillator that measures the speed and magnitude of recent price changes on a 0 to 100 scale.
How does RSI (Relative Strength Index) work in practice?
Conventional interpretation treats readings above 70 as overbought and below 30 as oversold, with the 50 line used as a rough momentum divide. More durable applications include divergence, where price makes a new extreme that the RSI fails to confirm, and failure swings. Many trend traders shift the bands, using 40 as support in an uptrend and 60 as resistance in a downtrend. The critical limitation is that RSI can remain pinned above 70 or below 30 for extended periods in a strong trend, so an extreme reading is not a reversal signal on its own.
What is an example of RSI (Relative Strength Index)?
If EUR/USD shows an average gain of 0.0032 and an average loss of 0.0011 over 14 periods, relative strength is 2.91 and the RSI reads about 74, an overbought value that does not by itself justify a short.
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