RSI and Moving Averages:A Practical Introduction to Momentum Signals and Strategy Testing
This article introduces the Relative Strength Index (RSI), explains how it is calculated and shows how a moving average of RSI can add useful context to momentum-based trading strategies. The aim is not to treat any indicator as a standalone answer, but to understand its logic, test its behavior and use it responsibly.
By Orkhan Abbasov
Indicators & Strategy • • 6 min read
RSI and a Moving Average of RSI
One line for the strength of momentum, one for its direction, both ready to test.
RSI Period
14
MA Period
9
Welcome to the blog
Here I will share ideas, knowledge and hands-on experience from the world of trading. We will explore technical indicators, break down the principles behind trading strategies, learn about risk management and dig into backtesting.
The goal is not simply to describe an indicator or tool. It is to understand how it works, what it is designed for and how it can be applied in practice. We will cover theory, examine real examples and test ideas against data. We will also look at how indicators can be used in Botico when developing and testing trading strategies.
Starting with indicators
The first indicator in this series is the Relative Strength Index, or RSI. What does it measure? What signals can it produce? How should those signals be interpreted, and when can they be misleading? We will answer these questions step by step with clear examples so that you can understand the reasoning behind RSI rather than simply follow a rule.
What is RSI
RSI is a widely used momentum indicator. Introduced in 1978, it gives technical traders a way to assess the relative strength of upward and downward price movement.
As a general rule, an asset is often called overbought when RSI is above 70 and oversold when it is below 30. Some traders view RSI moving down through the overbought level as a possible sell signal, and moving up through the oversold level as a possible buy signal. These thresholds are not a gold standard, however. Every indicator has a purpose that depends on market conditions.
RSI compares the strength of price advances on up days with the strength of price declines on down days. Comparing that result with price action can help traders form a view about how an asset may behave next. RSI generally works best in a ranging market rather than in a market with a strong, persistent trend.
Snapshot · Reading RSI
The 70 and 30 levels are a convention, not a gold standard: what a reading means depends on market conditions.
Illustration · RSI zones
How RSI is calculated
RSI is calculated in two stages. The first stage uses the following formula:
Stage 1 · The first RSI value
Average gain and average loss are the average percentage price increases and decreases over the selected lookback period. In the formula, average loss is treated as a positive number.
- Periods in which price declined count as zero when calculating average gain.
- Periods in which price rose count as zero when calculating average loss.
The standard lookback for the initial RSI value is 14 periods. For example, suppose that during the last 14 days the market closed higher on seven days and the initial average gain was 1%. During the other seven days it closed lower, with an initial average loss of 0.8%. The initial RSI calculation is:
Worked example · 14 days
1% ÷ 0.8% = 1.25 · 100 ÷ 2.25 ≈ 44.44 · 100 − 44.44 ≈ 55.56
Once data for 14 periods is available, a second calculation smooths the result. This makes RSI approach 100 or 0 only when the market has a strong trend. To keep the calculation readable, first update the smoothed average gain and loss, then use those values to calculate RSI:
Stage 2 · Smoothing after 14 periods
What the terms mean
Previous average gain
The average price gain over the prior 14 periods.
Current gain
The amount of price increase in the current period.
Previous average loss
The average price decline over the prior 14 periods.
Current loss
The amount of price decrease in the current period.
The number 13 smooths the previous average before the current period is added. A price decrease is again handled as a positive value in the calculation.
Adding a moving average to RSI
Once RSI is understood, we can add a moving average, or MA, calculated from RSI values themselves. This smooths the indicator's fluctuations and can provide additional signals.
What is an RSI moving average
A moving average is usually calculated from an asset's price. Here, it is calculated from RSI. For example, RSI(14) measures price changes over 14 periods, while MA(9) smooths the most recent nine RSI readings.
RSI(14)
Shows the strength of the current momentum.
MA(9)
Smooths RSI fluctuations and helps assess the direction of momentum.
How to read RSI and MA signals
When RSI crosses its moving average, it can point to a shift in momentum.
Illustration · RSI and its MA
- RSI crossing above MA may indicate strengthening upward momentum.
- RSI crossing below MA may indicate weakening momentum or a shift downward.
A crossover does not guarantee a price reversal. Charts can produce many false signals, so market conditions and other inputs still matter.
Three strategy ideas to test in Botico
01 · Line crossover
LONGRSI crosses above MA.
SHORTRSI crosses below MA.
This is a simple way to follow changes in momentum. In a sideways market, though, it may produce many false signals.
02 · Crossover with RSI levels
LONGRSI falls below 30, then returns above 30 and crosses above MA.
SHORTRSI rises above 70, then falls below 70 and crosses below MA.
This adds overbought and oversold conditions to the MA crossover. It lets you test whether considering the preceding RSI move improves the quality of the signal.
03 · Momentum direction filter
LONGRSI is above 50 and above its MA.
SHORTRSI is below 50 and below its MA.
Here, RSI and MA identify momentum direction. Instead of trading every crossover, the strategy selects situations where both conditions point in the same direction.
Suggested starting settings
The following settings are a sensible starting point for testing. They are not universal: results depend on the asset, timeframe and market regime.
| Parameter | Starting value |
|---|---|
| RSI period | 14 |
| MA period | 9 |
| MA type | SMA |
| Oversold level | 30 |
| Overbought level | 70 |
| Center level | 50 |
How to evaluate the idea
First, confirm that the moving average is calculated from RSI, not from the asset price. Then compare three versions:
Version 1
RSI on its own.
Version 2
RSI with MA crossover signals.
Version 3
RSI with MA plus the 30, 50 and 70 conditions.
During testing, look at profitability after fees, maximum drawdown and the number of trades. It is also useful to evaluate the strategy on historical data that was not used to choose its parameters.
The key point is simple: an MA can smooth RSI and add useful conditions to a trading strategy, but adding a second line does not automatically make signals more accurate. The only reliable answer comes from testing.
Next Step
Test all three versions before trusting one.
Build RSI(14) and its MA(9) in Botico's no-code signal builder, then run each version through backtesting on the same asset and timeframe. Keep the one that holds up on data you did not use to choose its settings.
Starting settings
RSI 14 · MA 9
Compare
Three versions
On this page
• What is RSI
• How RSI is calculated
• Adding a moving average to RSI
• Three strategy ideas to test in Botico
• Suggested starting settings
• How to evaluate the idea
Key takeaways
- RSI measures momentum on a scale of 0 to 100. Above 70 is often called overbought and below 30 oversold, but neither level is a gold standard.
- A moving average of RSI, such as MA(9) on RSI(14), smooths the line and adds crossover signals.
- A second line does not make signals more accurate by itself. Test each version on data you did not tune it on.
Signal
RSI generally works best in ranging markets. In a strong, persistent trend it can stay near 70 or 30 for a long time, so a level crossing there is weaker evidence.
Evidence first. Execution second.