RSI Through the Outer Box

The Relative Strength Index, or RSI, is one of the most common indicators on a chart. Most people learn it as a simple rule: above 70 is “overbought”, below 30 is “oversold”. That rule is too thin to use on its own. This lesson explains what RSI really measures, and then puts it next to the ladder, which tells you where in the box price is when RSI says “stretched”.

What you will be able to do

• Say what Wilder’s 14-period RSI measures, and work one step of it by hand.
• Explain why “overbought” and “oversold” describe recent momentum, not a place in the box.
• Read the RSI zones against the box edges and the 10% and 90% thresholds on the daily box.
• Name what would confirm a reading and what would break it.

What RSI measures

J. Welles Wilder introduced RSI in 1978.¹ It compares the size of recent up-closes with the size of recent down-closes, on a scale from 0 to 100. Each step uses the close of each bar. On a daily chart, a “period” is one day.

The steps for the standard 14-period RSI: