Trading Outpost

The RSI Mistake That Makes Traders Fight The Trend

Every figure, level, date and definition the video states, chased to a source.

Where RSI comes from

The relative strength index was developed by J. Welles Wilder and published in 1978. Wilder set it out in New Concepts in Technical Trading Systems (Trend Research, 1978), and it appeared the same year in Commodities magazine.

The default setting, and the scale

The usual default is fourteen periods, and the reading moves between zero and one hundred.

What the calculation compares

RSI compares average gains with average losses over the lookback.

The published form is RSI = 100 - 100 / (1 + RS), where RS = Average Gain / Average Loss. After the first window, Wilder smooths both averages rather than taking a plain mean: Average Gain = [(previous Average Gain) x 13 + current Gain] / 14, and the same for losses.

That is the whole basis of the video’s claim that the reading is a statement about recent upward closes against recent downward closes, and not about price being expensive or cheap.

Seventy and thirty

Above seventy is conventionally called overbought and below thirty oversold. These are Wilder’s own thresholds and are conventions rather than findings.

An extreme reading can persist

A momentum oscillator can reach an extreme and stay there while the trend continues.

The trend ranges: forty to ninety, and ten to sixty

In a bull market RSI tends to occupy roughly forty to ninety, and in a bear market roughly ten to sixty. These are the two ranges the video builds its regime argument on, and they are Constance Brown’s, reported in the same reference.

The fifty line

Above fifty, the average gain over the lookback is larger than the average loss. Below fifty, the average loss is larger.

This follows from the published formula rather than from a convention, and it is exact. RSI = 100 - 100 / (1 + RS) is above 50 exactly when RS > 1, and RS is the average gain divided by the average loss, so RS > 1 is the same statement as the average gain exceeding the average loss. The fifty line is therefore the point at which the two averages are equal.

Divergence

A bullish divergence is a lower low in price against a higher low in RSI, and a bearish divergence is a higher high in price against a lower high in RSI.

Divergence is unreliable inside a strong trend, which is the video’s central caution about it.

Failed signals

A failure swing is a documented RSI pattern, and it is the pattern the video describes as a failed signal. A bullish failure swing is RSI moving below thirty, bouncing back above it, pulling back while holding above thirty, and then breaking its prior high. The bearish version mirrors it around seventy.

Not verifiable

The charts in this video are illustrative rather than records of any market. Every price series shown is generated to demonstrate the behaviour being described, and every number printed on screen is computed from the series it sits beside. Nothing in the video claims that a named instrument did any of these things on any date, and no win rate, hit rate or backtest result is stated anywhere in it.

The interpretive parts of the video are judgement rather than measurement. Whether a particular pullback is a reset or a reversal, whether a level is worth respecting, and whether a signal has been confirmed are readings a trader makes, and no source establishes them as facts.