Vyreon LabsMarket Measurements

Learn the measurements

RSI (Relative Strength Index): Formula, Meaning and How to Read It

RSI formula with Wilder smoothing over 14 sessions, what 70 and 30 mean by convention, and how Vyreon ranks RSI against its own past year.

Reviewed · Sources at the end · How Vyreon measures
Vyreon's per-security reports are not live yet; this page describes what they will measure. Examples are illustrative.

The Relative Strength Index (RSI) measures the balance between recent up closes and down closes on a scale of 0 to 100. Near 100 means recent closes have been mostly gains, near 0 mostly losses, and 50 means gains and losses have roughly matched. The standard version, from J. Welles Wilder, looks back 14 sessions.

RSI Formula

  1. For each session, take the change in the closing price. A rise counts as a gain (and a loss of 0); a fall counts as a loss (and a gain of 0).
  2. Average the gains and the losses with Wilder smoothing: start with the simple average of the first 14, then update each day as (13 × previous average + today's value) / 14.
  3. RS = average gain ÷ average loss.
  4. RSI = 100 − 100 / (1 + RS).

Wilder smoothing changes more slowly than a plain 14-day average, so tools that use a simple average show slightly different numbers.

Illustrative example: with a smoothed average gain of 1.00 and a smoothed average loss of 0.50, RS is 2 and RSI is 100 − 100/3 ≈ 66.7.

What Does RSI Mean? Overbought And Oversold

By convention, an RSI of 70 or above is called "overbought" and 30 or below "oversold". The labels describe how one-sided recent closes have been, not whether the price is right or wrong. A steadily rising security can stay above 70 for weeks, and a falling one below 30. Some traders use 80 and 20 instead: the thresholds are conventions, not rules.

RSI Percentile: Compared With Its Own Past

An RSI of 65 can be ordinary for one security and rare for another. Vyreon also reports where today's RSI ranks against the same security's own recent past: the share of the previous 252 sessions (about a year) whose RSI was lower than today's. A percentile of 90% means today's RSI is higher than on 90% of those sessions.

How Long The RSI Condition Has Lasted

Vyreon counts the consecutive sessions, including today, that RSI has spent in its current zone: 70 or above, 30 or below, or in between. Ten sessions above 70 describe a different stretch of trading from a single day that touched it.

How Vyreon Calculates It

  • Wilder RSI(14) on daily closes adjusted for splits and dividends, so a split or an ex-dividend drop does not count as a loss.
  • Condition: "overbought by convention" at 70 or above, "oversold by convention" at 30 or below, otherwise neutral.
  • Percentile against the prior 252 sessions, reported once at least 126 prior readings exist.
  • The number of sessions in the current condition.

Only sessions up to and including the reported day are used.

What RSI Does Not Tell You

  • It describes recent closes. It does not predict the next move.
  • It ignores volume and intraday highs and lows; the money flow index adds volume.
  • Crossing 70 or 30 is a convention, not an event that requires anything to happen next.

Related: stochastic oscillator · Williams %R · MACD · money flow index · moving averages

Sources

  • J. Welles Wilder Jr., New Concepts in Technical Trading Systems (1978): the original RSI, Wilder smoothing and the 70 and 30 reference levels.
  • John J. Murphy, Technical Analysis of the Financial Markets (New York Institute of Finance, 1999): general reference for RSI and its conventional readings.

The "overbought" and "oversold" labels are trading conventions; we know of no peer-reviewed source establishing them as thresholds.