Relative Strength Index

Relative Strength Index (RSI): A Momentum Lens on Speed and Shifts

Key Takeaways

Relative Strength Index (RSI) is a momentum oscillator that measures the speed and change of price moves on a 0–100 scale.
Values above 70 often suggest stretched upside; values below 30 suggest stretched downside.
Default setting is 14 periods, but shorter or longer lookbacks adjust sensitivity.
A backtest on NASDAQ 100 ETF (QQQ) shows how an RSI Momentum Signal helped capture gains in bull markets while limiting drawdowns over the past 20 years.

Why RSI Matter

Markets don’t just move—they speed up and slow down. RSI turns that pace into a simple number, so you can quickly see when momentum is strong, fading, or potentially reversing.

Clarity: A single oscillator highlights when recent moves look stretched relative to the recent past.
Momentum insight: Flags shifts (divergence, crosses, ranges) that often precede price turns or continuation after pullbacks.
Flexibility: Works across assets and timeframes; thresholds can be adapted to trend strength.

How Traders Use RSI

Overbought / Oversold zones: Above 70 signals stretched upside; below 30 signals stretched downside. In strong uptrends, RSI may bottom near 40–50; in downtrends, it may top near 50–60—context matters.
Crosses of 70/30: A drop back below 70 can hint at waning upside momentum; a rise above 30 can hint at recovering momentum after weakness.
Divergences: Price makes a higher high while RSI makes a lower high (possible momentum loss); or price makes a lower low while RSI makes a higher low (possible momentum recovery).
Swing rejections: Patterns where RSI exits an extreme and then holds a higher low (or lower high) before breaking the prior swing—used to time momentum shifts.
Positive/negative reversals: RSI makes a lower low while price makes a higher low (positive), or RSI makes a higher high while price makes a lower high (negative)—used as additional momentum context.
Hidden Divergences (also called Positive/Negative Reversals): This signal shows up inside an existing trend and is mainly used to confirm continuation rather than call for a full reversal.

Bullish hidden divergence (Positive): In an uptrend, price makes a higher low, but RSI makes a lower low. This suggests momentum is holding up, and the trend may continue.

Bearish hidden divergence (Negative): In a downtrend, price makes a lower high, but RSI makes a higher high. This shows momentum is still weak, and the downtrend may extend.
Range vs. trend settings: In ranges, classic 70/30 often works; in strong trends, some traders adapt thresholds (e.g., watch 40–50 supports in uptrends, 50–60 caps in downtrends).

Real-World Results: Do They Actually Work?

To see how RSI performs when used as a momentum-confirmation tool, we tested a CrossAbove 40 strategy on QQQ from 2005 to 2025.

Buy: When RSI (14) crosses above 40 while price remains above its 200-day moving average.
Sell: When price closes below the 200-day moving average.

Results over 20 years:

+318.6 % total return (vs. +1455.5 % for buy-and-hold).
Smaller drawdowns: roughly –27 % vs. –50 %+ for QQQ in major crashes.
Fewer decisions: 19 trades in 20 years with a 42 % win rate.
Average gain +25.1 % vs. average loss –2.8 %.
Time in market: 54.6 %, reducing exposure by nearly half.
Long-term follow-through: Median gain +11.8 % after 6 months and +20.8 % after 1 year following a signal.

Takeaway: Even though RSI CrossAbove 40 didn’t beat buy-and-hold, it historically provided smoother participation in sustained uptrends and helped avoid deep equity declines during bear markets. It worked best as a confirmation signal — re-entering after pullbacks rather than calling exact bottoms.

This backtest was run using SentimenTrader's Proprietary Backtest Engine, which lets you test your strategy with nearly 100 technical indicators and over 17,000 indicators covering Sentiment, Trend Score, Breadth, Macro, and Seasonality. No coding required.

The Technical Bit

Calculation and Components

RSI compares the average gain to the average loss over a chosen period (default 14), then rescales the result to a 0–100 range.

Formula:

Where:

Average gain and average loss: Calculate the closing price changes for each of the past n periods (default is 14). Gains count as positive values, losses count as positive values in the loss bucket. From the 15th period onward, Wilder’s smoothing method is applied to update the averages, which keeps RSI responsive without recalculating a fresh arithmetic mean each time.

Settings

Default lookback: 14 periods.
Shorter (e.g., 7–9): More sensitive, more signals (and more noise).
Longer (e.g., 21–30): Smoother, fewer signals, slower to react.
Threshold tweaks: Keep 70/30 for ranges; consider 80/40 or 60/40-style adaptations in strong trends (many traders simply monitor 40–50 supports in uptrends and 50–60 caps in downtrends).

Variations you may encounter:

Stochastic RSI: makes RSI even more sensitive, showing where RSI sits compared to its own highs and lows.
Modified RSI (with volatility inputs): adds volatility (like how “wild” prices are) to reduce false signals.

What This Means for Traders

RSI simplifies momentum into one number, adding discipline when emotions run hot. It can help you spot stretches, time pullbacks within trends, and notice when momentum stops confirming price.

Still, RSI can stay extreme during powerful trends and whipsaw in choppy markets. That’s why many traders pair it with tools from other categories—for example, Moving Averages (Trend) for direction context, On-Balance Volume (Volume) for participation, or Bollinger Bands (Volatility) to see if moves are outside typical ranges. Combining evidence—and validating ideas with a backtest—helps separate robust signals from noise.

What It Means for Traders

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Test your strategies with SentimenTrader’s Proprietary Backtest Engine, equipped with nearly 100 technical indicators and over 17,000 indicators covering Sentiment, Trend Score, Breadth, Macro, and Seasonality. No coding required.