The relative strength indicator (often called relative strength index and abbreviated to RSI) is a useful tool that calculates a stock’s momentum. It takes an average of the stock’s recent gains over a set time span (usually 14 periods) and then compares them to the stock’s average losses. The RSI can be used in both ranging and trending markets, and therefore can be used in several different ways.

To begin, it indicates the current strength or weakness of a security by calculating a ratio of higher closing prices to lower closing prices. Second, the RSI can be used to identify an overbought level when it is above 70, and an oversold level when it is below 30. Third, the RSI can also be used as a divergence indicator, with entries based upon divergence between the RSI and the price bars. A Bearish indicator forms if the price makes a new high, but the RSI makes a lower high. A Bullish indicator forms if the price makes a new low, but the RSI makes a higher low.

To remain effective, the RSI must be constantly updated. The more periods it takes into account, the more accurate it is. As with any average-dependent function, more data points lead to a higher quality reading.