In this lesson
- compute RSI step by step from the average rise and fall
- find out why Binance shows three RSIs and how to switch them on
- understand why a market can stay "overbought" for weeks
The RSI indicator is the market's thermometer: it shows how "heated" a move is on a scale from 0 to 100. Above 70 people speak of overbought, below 30 of oversold. Professor Wick starts sweating at seventy – but nobody ever sold anything to a thermometer.
How RSI is computed#
RSI compares how much the price on average rose and how much it fell over the last N candles:
- For each candle compute the change against the previous close. A rise goes to "gains", a fall to "losses".
- Average the gains and losses over the last N candles (default N = 14). Later values only move 1/N of the way towards the new change – so-called Wilder smoothing.
- The ratio of the average gain to the average loss is RS. From it RSI = 100 − 100 / (1 + RS).
When the market only rises, losses are zero and RSI is 100. When rises and falls are equal, RSI is 50. Walk through it on a real chart:
RSI 14 in the panel below the chart, lines at 70 and 30. Highlighted candles = the price change being counted.
Jan 26, 2024: the price changed by +1,862.42. The average rise and fall move 1/14 of the way towards that change: rise 391.65, fall 414.31. The ratio is 0.945, so RSI = 48.6.
Where to find it on Binance#
In Original mode click the indicator icon above the chart, switch to the Sub Indicator tab, tick RSI and click Save. A panel with three lines appears below the chart: RSI(6), RSI(12) and RSI(24), with dashed levels at 70 and 30. The short RSI 6 is very sensitive, the long RSI 24 calm. In Trading View mode and in most textbooks a single RSI 14 is used – the one the charts in this course draw.
The period changes everything#
Try moving the period. A short RSI jumps into the 70/30 zones again and again, a long one hardly ever:
The line entered the overbought or oversold zone 13×. The common default setting – try moving the slider both ways.
Overbought does not mean "sell"#
Bitcoin's RSI 14 crossed 70 on 9 February 2024 (close 47,133). Anyone who sold then because "it is overbought" watched RSI cross seventy again on 26 February and 6 March, and the price closed at 73,072 on 13 March. Over the whole period shown, RSI was above 70 on 84 days out of 444.
- RSI 14 (panel below the chart, lines at 30 and 70)
In a strong trend, "overbought" is more a sign of strength than of weakness. RSI says the most in a market moving sideways – and above all together with other tools. More on working with it is in the lesson RSI and momentum.
Try it:
Click the candle on which RSI 14 first crossed above 70.
No candle picked yet.
RSI is not a trade signal
The 70 and 30 levels are not "sell" and "buy" orders. An overbought market can keep rising and an oversold one keep falling. Trading on RSI alone without a stop-loss and a plan is a bet, not a strategy.
Common myths#
- "RSI above 70 = sell." In a strong rise RSI often stays above 70 for weeks.
- "Three RSIs on Binance are three signals." It is one measure with three periods – one piece of information three times.
- "RSI 50 is neutral, so it says nothing." It says rises and falls are balanced – neither side has the upper hand.
Summary
- RSI = 100 − 100 / (1 + RS), where RS is the average rise divided by the average fall over N candles.
- Binance's Original mode draws RSI 6, 12 and 24; the common standard is RSI 14.
- A shorter period = more entries into the 70/30 zones, more false signals.
- Overbought and oversold describe a state, they are not trading orders.