The Relative Strength Index (RSI) is one of the most used indicators on any chart. It is also one of the most misread. Used well, it tells you about the strength of a move. Used badly, it tells you to sell every strong rally.
What RSI measures
RSI compares the size of recent up moves with the size of recent down moves, usually over the last 14 periods, and turns that into a number between 0 and 100.
- When recent gains have been much larger than recent losses, RSI is high.
- When recent losses have been much larger than gains, RSI is low.
- When they are balanced, RSI sits near 50.
So RSI is a measure of momentum: how strongly price has been moving in one direction.
Overbought and oversold
The classic thresholds are:
- Above 70: overbought. Price has risen strongly and quickly.
- Below 30: oversold. Price has fallen strongly and quickly.
The common mistake is to read 70 as "sell now" and 30 as "buy now". In a strong uptrend, RSI can stay above 70 for a long time while price keeps climbing. Overbought means strong, not finished.
Three practical ways to use RSI
1. Confirm the trend with the 50 line
In an uptrend, RSI tends to stay above 50, and pullbacks often stop around 40–50. In a downtrend, RSI tends to stay below 50, and bounces often stall around 50–60. If you are trading with the trend, the 50 line helps confirm it is still intact.
2. Look for divergence
A bearish divergence is when price makes a higher high but RSI makes a lower high. The move is continuing, but with less force behind it. A bullish divergence is the reverse: a lower low in price with a higher low in RSI.
Divergence is a warning, not a trigger. Wait for price itself to confirm, for example by breaking a trend line or a support level.
3. Use extremes in a range
When a market is clearly moving sideways, readings near 70 at the top of the range and near 30 at the bottom are more useful. In a range, overbought and oversold do tend to mean "near the edge".
Settings
The default of 14 suits most charts. A shorter setting makes RSI faster and noisier; a longer one makes it smoother and slower. Change it only for a reason you can explain.
Common mistakes
- Selling only because RSI is above 70 in a strong uptrend.
- Treating every divergence as a reversal.
- Using RSI alone, without looking at the price structure.
- Forgetting the stop-loss. An indicator can be wrong for longer than an account can stay open.
In short
RSI measures momentum from 0 to 100. Use the 50 line to confirm a trend, divergence as an early warning, and 70/30 mainly in ranges. Always let price action have the final word.
Educational content, not investment advice. Trading carries risk, including the loss of capital.