RSI — Relative Strength Index
The RSI is a momentum oscillator that measures the speed and magnitude of recent price changes (default 14-period window). It ranges from 0 to 100. It's one of the most widely used technical indicators because it combines reading simplicity with strong reversal signals.
Definition and formula
The RSI compares the average of recent gains to the average of recent losses:
RS = average gain over N periods / average loss over N periods
The standard window is 14 periods (days for the Cash Scanner daily scan). The shorter the window, the faster the response but the noisier the signal.
How to read the RSI
Classic thresholds
- RSI > 70 — overbought zone. The asset has rallied sharply, a downward reversal becomes likely short-term. This is NOT an automatic sell signal: a stock in a strong uptrend can stay > 70 for weeks.
- RSI < 30 — oversold zone. The asset has dropped sharply, a technical rebound becomes possible. Relevant in confluence with other signals (support, MA200, divergence).
- RSI between 40 and 60 — neutral zone. No actionable information alone.
- RSI > 50 — bullish bias (average gains dominate).
- RSI < 50 — bearish bias (average losses dominate).
RSI divergences
The most powerful RSI signal isn't the 30/70 threshold — it's the divergence between price and RSI:
- Bullish divergence: price makes a new low, RSI makes a higher low. Indicates that selling pressure is exhausting.
- Bearish divergence: price makes a new high, RSI makes a lower high. Indicates that buying pressure is fading.
Cash Scanner detects these divergences automatically over a rolling window. See the divergences guide for details.
How Cash Scanner uses RSI
The RSI enters several components of the /100 score:
- Momentum mode: an RSI > 50 and accelerating boosts the score (confirmation of bullish dynamics). RSI > 80 starts to penalize (reversal risk).
- Phoenix mode: conversely, an RSI < 30 exiting oversold boosts the score (early entry on technical rebound).
- Bullish RSI divergence: valued entry signal, especially in confluence with other signals (Williams %R, Stochastic, MACD).
Limits and common pitfalls
- RSI in strong trends: a stock in an accelerating uptrend (post-earnings beat, M&A) can stay > 70 for weeks. Selling solely on the RSI threshold misses most of the performance.
- RSI on low volume: if volume is anemic, the RSI measures noise. Always cross-reference with relative volume (OBV, volume anomaly).
- RSI vs absolute price: two stocks at the same RSI can be very different. The RSI is relative to their recent history, not an absolute quality scale.
- Window 14 vs 7 vs 21: adapt to horizon. 14 is the swing trading optimum (days-weeks). Shorter = noise. Longer = lag.